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After Cooling Inflation, PCE Could Help Settle the Rate Cut Size Debate

Published 08/15/2024, 01:23 AM
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  • Inflation fell to 2.9% in July.
  • It is the first time the CPI has dropped below 3% since March of 2021.
  • It is the fourth month in a row that the inflation rate has decreased.

The Consumer Price Index dropped below 3% in July, marking the first time that has happened in more than 3 years.

The inflation rate fell for the fourth straight month in July, as the Consumer Price Index (CPI) dropped below 3% for the first time since March 2021.

The steady disinflation has significantly improved the odds of the Federal Reserve cutting interest rates at its next meeting on September 17-18.

In fact, CME Group’s FedWatch monitor, which polls interest rate traders, says there is a 0% chance that the Fed keeps rates the same in September. The only question is if it will be a 25 basis points or 50 basis point cut.

Of course, FedWatch is just a poll that has nothing to do with the Fed, so we won’t know for certain until the Fed meeting in September, but the likelihood of a cut is very high, particularly after the CPI data came on Wednesday.

Inflation Falls Below 3% for First Time in Three Years

The inflation rate over the last 12 months has increased by 2.9%, according to the July CPI, which is the lowest it has been since March of 2021. The inflation rate came in lower than the 3% rate that economists anticipated.

Meanwhile, core CPI, which excludes food and energy prices, which can be more volatile, was at 3.2% in July, down from 3.3% in June, but in line with expectations.

Over the past 12 months, the highest inflation has been in transportation services (8.8%). shelter (5.1%), electricity prices (4.9%) and food away from home (4.1%).

The largest price drops over the past 12 months have been in used cars and trucks (-10.9%), gas (-2.2%), and energy commodities (-2%).

Overall food prices have climbed 2.2% over the past 12 months, including food at home and away from home. The meats, poultry, fish, and eggs index climbed 3% over the last 12 months while the nonalcoholic beverages index rose 1.9%. The index for cereals and bakery stayed the same while both the fruits and vegetables and dairy indexes fell 0.2%.

For the month of July, inflation rose 0.2%, which was what economists had expected.

The items that saw the biggest declines in July were used cars and trucks, with prices down 2.3%, and gas utility prices, down 0.7%. Also, apparel was 0.4% lower in the month.

The biggest price gains in July were in fuel oil, up 0.9% after declining over the two previous months, and shelter, up 0.4%. Prices for transportation services also went up 0.4%. Overall, food prices were up 0.2%, while energy costs were flat.

Market Expects 25 to 50 Point Rate Cut in September

The Dow Jones Industrial Average was moving higher, up 242 points. The S&P 500 was up about 20 points, while the Nasdaq was up 16 points, or 0.09%.

According to CME’s FedWatch tool, interest rate traders saw 0% chance that the Fed would hold rates at the 5.25% to 5.50% level.

Some 55% said they expected a 25-basis point cut to 5.00% to 5.25%, while 45% predict a 50-basis point reduction in September to 4.75% to 5.00%.

Just one day prior to the CPI release, 53% thought there would be a 50-basis point cut, while 47% projected a 25-point reduction. So, the inflation news slightly tempered traders enthusiasm for a 50-basis point cut in September.

That could change again when the Personal Consumption Expenditures (PCE) report for July comes out on August 30.

The PCE is the Fed’s preferred gauge of inflation, and it has dropped in each of the last three months, down to 2.5% in June.

Another decline in the PCE toward the Fed’s target range of 2% annual inflation would continue to raise optimism for a September rate cut.

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