UNITED STATES: INFLATION SLOWS MORE THAN EXPECTED, TO 8.5% OVER A YEAR
WASHINGTON (Reuters) – U.S. consumer price inflation slowed more-than-expected in July on a sharp fall in gasoline costs, official statistics showed on Wednesday.
Markets are hoping these numbers will prompt the Federal Reserve (Fed) to ease the scope of monetary tightening.
The consumer price index (CPI) was flat last month after rising 1.3% in June, the Labor Department said. Within a year it rose by 8.5%, after +9.1% in the previous month.
Economists polled by Reuters were expecting a less pronounced slowdown, with an average increase of 0.2% month-on-month and 8.7% year-on-year.
This is the largest month-on-month deceleration in inflation since 1973, and follows a roughly 20% drop in gasoline prices.
Gas pump prices skyrocketed in the first half of the year due to the war in Ukraine, hitting a record high of more than $5 a gallon in mid-June, according to the AAA.
The price increase in recent months can also be explained by the blockade of global supply chains and the government’s massive economic stimulus measures at the beginning of the COVID-19 pandemic.
The core inflation index (“Core CPI”), which excludes energy and food, rose 0.3% over the past month and 5.9% on a yearly basis, as in June.
Consensus was down 0.5% mom and 6.1% yoy.
“IT’S A BEGINNING”
Futures on Wall Street indexes and European stocks rose after the release of the data as the Federal Reserve downgraded expectations of a three-quarter-point rate hike.
Federal funds rate futures now reflect the likelihood that the US Federal Reserve will hike rates by 50 basis points in September, instead of the 75 basis points estimated before the inflation figures were released.
In the American bond market, Treasury bill yields have fallen sharply, the biennial – which is most sensitive to expectations of interest rate changes – lost more than 16 basis points to 3.1253%, while the dollar amplified its decline against a basket of reference currencies.
However, the Federal Reserve indicated that it would take several months for the CPI index to decelerate before ending aggressive monetary tightening.
“With CPI at 8.5% and core inflation at 5.9%, this isn’t yet the sharp decline the Fed is aiming for. But it’s a start and we expect more signs of broader rate cuts in the coming months price pressure.” said Paul Ashworth, chief economist at Capital Economics.
The Fed’s rate hike path is of key interest to investors, businesses and consumers. Bank officials said last week that they would continue raising rates until there is strong and durable evidence that inflation is on track to return to the 2% target.
(Report Lindsay Duismuir, French version Laetitia Volga, edited by Kate Entringer)