The market had a mixed reaction yesterday. For example, gold gained over 1%, while the Nasdaq and S&P 500 faced selling pressure due to concerns over Federal Reserve actions.
Additionally, the US Dollar Index lost some ground but settled at 104.31 later in the trading session. Bond yields, especially the 10-year, declined as a result of the softer CPI numbers.
The recent CPI print showed a decrease to 3% from the previous 3.3%, helping traders solidify an 80% certainty of a rate cut in September, according to the Investing.com Fed Tool Monitor.
Why Are Traders Betting on a Rate Cut?
The key question is: Why are traders anticipating a rate cut in September while inflation remains at 3%, still above the Fed's 2% target? Moreover, with inflation hovering around 3% for the past year, has the Federal Reserve made significant progress?
According to a CNBC article, shelter prices, which constitute the largest share of the CPI at around 36%, have shown declines. Medical and transportation services have also begun to decrease. There was a monthly increase of 0.2% in shelter costs in June, but this is a smaller increase compared to previous months. Transportation costs fell by 0.5%, while medical costs rose by 0.2%.
Service Inflation: A Persistent Challenge
Service inflation is typically more challenging to suppress due to strong demand, but progress is being made. For instance, new rental contracts have significantly declined from a high of 12% in 2022 to 0.4% in 2024, according to CNBC.
Conclusion
While inflation remains at 3%, we cannot overlook the significant declines in major CPI components. The hope is that this trend continues, bringing the Federal Reserve closer to its 2% inflation goal.
The path forward is complex, but there are signs of progress.