Economic data released this week suggest inflation continues to cool, paving the way for the Federal Reserve to cut interest rates, which will relieve some of the high borrowing costs weighing on consumers and businesses.
Year-on-year inflation fell to 2.9 percent, the lowest since March 2021, according to the Consumer Price Index (CPI) report for July released on Wednesday. The CPI captures changes in the prices of representative goods and services purchased by consumers compared. in the same month of the previous year and is considered a standard measure of inflation. However, the report found costs associated with it child care And rent a house Inflation has slowed significantly from a peak of 9.1 percent in June 2022 and is now closer to the Fed’s 2 percent target rate, which has continued to rise at a higher rate than overall prices. And had it not been for rent inflation, overall inflation would have been below the 2 percent target.
It followed another good day of data on Tuesday, when the latest producer price index report, which measures changes in the prices of goods and services sold by producers to retailers, indicated that wholesale inflation also eased to 0.1 percent, the same low as pre-pandemic levels. High wholesale inflation can sometimes indicate that prices for consumers will rise as retailers have to recover higher costs.
These numbers suggest a better economy for consumers, but the overall picture is certainly not perfect. The United States just added 114,000 jobs In July, that was below expectations by about 150,000, and unemployment rose to 4.3 percent — the highest in any month since October 2021.
Those numbers aren’t a crisis in and of themselves: The unemployment rate is still relatively low, and the weak hiring performance isn’t catastrophic, but both are taken as signals that the U.S. economy may be showing some cracks.
What Low Inflation Means for the Economy and Interest Rates
This week’s news has many economists and finance experts arguing that the time has come for the U.S. Federal Reserve — which sets interest rates, manages the money supply and buys assets as a steward of the U.S. economy — to cut interest rates.
“Today’s inflation data provides further support for an aggressive Fed rate cut starting in September,” said Preston Caldwell, chief U.S. economist at Morningstar.
Lowering interest rates will make it easier for consumers and businesses to repay debt and borrow money. This can eventually improve employment and lead to overall economic growth. But there is some uncertainty about how much lower rates will help the overall economy.
Fed Chair Jerome Powell has been making statements over the past month that have left open the possibility of the Fed cutting rates at its Sept. 17 meeting without fully committing. “The committee’s overall sense is … we’re getting close to the point where it would be appropriate to start dialing back the limits. We’re not at the point yet,” he said on Aug. 1. “We’d like to see better data.”
Caldwell said Morningstar was projecting a 0.25 percent cut in September, lower than the 0.5 percent that other analysts were expecting.
A brief global stock market slump linked to trading activity in Japan has added to the urgency of cutting rates in recent weeks due to worrisome job numbers. Both were seen as signs that the economy could use a little stimulus. But even low interest rates may not immediately relieve existing pressures on the economy.
There is growing uneasiness among both financial analysts and consumers that a recession is on the horizon. Caldwell said Morningstar sees a slowdown in economic activity next year. Some other analysts have warned that the US economy could See a recession Even without an official recession—that’s defined as two straight quarters of negative economic growth. And there’s a question about how much Fed policy can actually avoid.
Consumer confidence also fell in July 3 5 Americans Falsely believe the US is already in recession according to Affirm’s latest survey.
The fundamentals of the economy are still relatively strong. Households and businesses have managed their debt relatively well, and hiring has held up much longer than most people expected, Matt Collier, an economist at Moody’s Analytics, told me recently. But it may take some time for people struggling with inflation or looking for a job in a tough market to feel the relief they’re looking for.
