U.S. CPI falls below 3% for the first time since March 2021
America’s enduring battle against inflation reached a significant milestone in July as the Consumer Price Index (CPI) fell below 3% for the first time since March 2021.
According to the Bureau of Labor Statistics, the CPI rose 2.9% in the 12 months through July, slowing from June’s 3% annual increase. The reading was below what economists had expected.
Compared to June, consumer prices were up 0.2% after a 0.1% drop the previous month.
So-called core CPI, which excludes volatile food and gas prices, slowed to an annual rate of 3.2%, the lowest since April 2021.
Inflation has been retreating since mid-2022 when the CPI peaked at a 40-year high of 9.1%. But progress wasn’t always smooth.
As Creditnews reported, inflationary pressures returned at the beginning of the year, forcing the Federal Reserve to backtrack on plans to start cutting interest rates.
Now, economists say the worst of the inflationary spiral is in the rearview mirror.
“Breaking the 3% barrier is a key psychological positive,” Sung Won Sohn, professor of finance and economics at Loyola Marymount University, told CNN in an interview. “It shows that inflation is not only trending down, but disinflation is on track.”
Breaking below that threshold should give the Fed the green light to begin cutting rates as soon as next month.
CPI data seals rate cut, economists say
The sustained drop in inflation over the past few months “should give the Fed lots of confidence to start the easing process,” said Nationwide chief economist Kathy Bostjancic.
Cumberland Advisors’ chief U.S. economist David Berson was less enthused by the latest report but said it was “good enough” for the central bank to begin lowering rates next month. “Inflation is moving lower but only slowly now,” he told The Wall Street Journal.
LPL chief economist Jeffrey Roach said investors and central bankers will find the latest CPI report “mostly good for markets and the economy.” With inflation cooling, “the Fed can legitimately cut rates yet keep policy restrictive overall,” he said.
Bloomberg economists Anna Wong and Stuart Paul now say a September rate cut is their base case scenario, with additional cuts likely to follow.
A September rate cut would help the Fed regain its legitimacy among investors and the public. According to the Economic Policy Institute, “the Fed waited too long to cut interest rates,” as evidenced by rising unemployment and a cooling economy.
JPMorgan economist Michael Feroli and WHU economics professor Ralf Fendel share a similar view. They argued that policymakers should have cut interest rates in July and that doing so could have helped Wall Street avoid the “Black Monday” stock crash from earlier this month.
The Fed will hold its next policy meeting on Sept. 17-18, followed by meetings in November and December. According to CME Group’s FedWatch tool, rate cuts are expected at all three meetings.