US on the way to curbing inflation: Federal Reserve looks set to hold fire on rate rises
Inflation battle: Prices in America climbed by 3.2% year-on-year in July, a slight rise from the 3% recorded in June but a touch below the 3.3% predicted by economists
The US appeared to have finally brought inflation to heel as prices rose by less than expected last month.
Prices in America climbed by 3.2 per cent year-on-year in July, a slight rise from the 3 per cent recorded in June but a touch below the 3.3 per cent predicted by economists.
Core inflation, which strips out volatile costs of items such as food and energy, also slowed to 4.7 per cent in July from 4.8 per cent, a relief for many US policymakers as the figure had proved more stubborn than the headline inflation rate.
The 3.2 per cent figure is well down on the peak US inflation rate of 9.1 per cent which was hit last summer and is steadily moving closer to the Fed’s target of 2 per cent.
Inflation slowing: Traders are now almost certain the US central bank (pictured) will keep rates at their current level of 5.25-5.5%
It is also less than half the rate recorded in the UK where inflation remains stubbornly high.
The UK will release its inflation print for July next Wednesday and analysts have pencilled in a fall to 6.8 per cent, still well above America and the rate of 5.5 per cent in the Eurozone.
Recent rises in US fuel and gasoline prices were among the main causes of the uptick in inflation, although the country’s vast reserves of domestic energy such as shale oil have managed to keep it relatively insulated from global price swings sparked by the Russian invasion of Ukraine.
The rating will provide relief for the Federal Reserve and chairman Jerome Powell. It also raised hopes the US central bank will opt to keep interest rates steady at its meeting next month.
David Henry, investment manager at Quilter Cheviot, said the reading for July was likely to buoy markets as the Fed would have ‘enough cover now to hit the pause button on the interest rate rises.’
Traders are now almost certain the US central bank will keep rates at their current level of 5.25-5.5 per cent, with over 90 per cent predicting the status quo will be maintained.
‘It is increasingly looking like the Fed has done a good job, for now anyway. While we could see inflation track upwards again, markets will be giving them the thumbs up in the short term,’ said Neil Birrell, chief investment officer at Premier Miton.
The dollar weakened as traders priced in fewer rate hikes, with the pound rising briefly above $1.28, while yields on US two-year Treasury bonds, which are sensitive to interest rates, fell around 0.03 per cent.
The lower-than-expected inflation figures followed data last week that showed the US jobs market was cooling after the Fed raised rates to their highest level in over two decades.
The prospect of a pause to interest rate rises sparked a rally in equities markets, with the Dow Jones Industrial Average rising 53 points while the S&P 500 gained one point and the Nasdaq rose 1.75 per cent.
London markets also received a boost with the FTSE 100 up 31 points or 0.4 per cent while the FTSE250 added 0.3 per cent or 57 points to just under 18.994.
But the data highlights the growing gulf between the US and the UK.
The Bank of England has already raised interest rates fourteen times in a row and is expected to hike at least another two times before the end of the year, peaking at just under 6 per cent.
UK inflation is expected to remain above the Bank’s own 2 per cent target for at least another year, with its forecasters predicting price rises won’t hit that level until ‘early 2025.’
But analysts also cautioned that a pause in rate hikes across the Atlantic did not mean the Fed would be lowering rates any time soon.
‘While inflation is moving in the right direction, the still-elevated level suggests that the Fed is still some distance from cutting rates,’ said Seema Shah, strategist at Principal Asset Management.
‘Indeed, disinflation is unlikely to be smooth and will require some additional economic pain before the 2 per cent target comes sustainably into view,’ she added.
