US inflation falls by more than expected

Markets now pricing in a full 1% of cuts in US rates by the end of this year.

14 August 2024

An interest rate cut at the Federal Reserve's (Fed) upcoming September meeting looks all but certain now as US headline Consumer Price Index (CPI) inflation came in at 2.9%, with core prices rising at a 3.2% rate. Futures markets are now pricing in the equivalent of 0.4% points of rate cuts at the September meeting, with just over fully 1% discounted by the end of 2024. While the broad disinflationary trend is likely to be welcomed by consumers showing signs of belt-tightening, the inflation figures do technically remain above the Fed's 2% target rate and talk of a full 50 basis point cut next month seems premature. Any policy easing by the Fed will carry with it the assumption that inflation will get down to 2% in time and so has a pre-emptive quality about it. This leaves the Fed - and indeed the market - hostage to fortune. Late 2023 demonstrated that certainty about the inflation path can be quickly undone by an un-cooperative economy.

Today's CPI print out of the UK perhaps sounded a more immediate note of caution for the US central bank. While the UK's higher-than-2% figure was to an extent expected, it is still slightly jarring when inflation comes in higher than target after a recent rate cut. Whatever the Fed does in September therefore, it will be very keen to convey on-going data dependency from one meeting to the next, rather than setting out a trajectory that might just fail to materialise. For now though, US markets and consumers are looking forward to some easing in the 5.3% target interest rate that they have had to contend with for over a year now.