July Inflation Rate Falls More Than Expected, Supports Hopes For Large Fed Rate Cuts

The Consumer Price Index (CPI) saw a cooler-than-anticipated annual headline print in July, continuing the disinflationary trend and supporting market hopes for large interest rate cuts by the Federal Reserve.

In July, the average price increase for a basket of goods and services tracked by official statistics reached 2.9% year-over-year, slightly below economist forecasts of 3%. This latest inflation reading marks the fourth consecutive decline in the annual inflation rate and smallest inflation uptick since March 2021.

July CPI Inflation Report: Key Highlights

• Headline CPI inflation fell from 3% in June to 2.9% in July 2024 on a year-over-year basis, falling short of the consensus forecast of 3% tracked by TradingEconomics.
• On a monthly basis, inflation increased by 0.2% in July, rebounding from the previous month's contraction of 0.1% and matching estimates of 0.2%.
• The shelter index climbed by 0.4% in July, contributing to nearly 90% of the overall monthly increase in the all-items index.
• Core inflation, which excludes volatile energy and food items, eased from 3.3% to 3.2% year-over-year in July, matching forecasts.
• On a monthly basis, core inflation rose by 0.2%, accelerating from the previous 0.1% and matching the expected 0.2%.
• In July, several indexes saw increases, including shelter, motor vehicle insurance, household furnishings and operations, education, recreation and personal care. Indexes for used cars and trucks, medical care, airline fares and apparel were among those that declined during the month.

Market Reactions

Before the release of July’s inflation data, traders had assigned equal odds —50% each — for the likelihood of a 50-basis-point rate cut or a smaller 25-basis-point cut by the Federal Reserve in September.

The cooler-than-expected CPI reading is likely to support expectations for a larger rate cut while trimming the probability of a more modest 0.25% reduction.

The market reaction to the inflation data was relatively muted, with S&P 500 futures up 0.1% by 8:34 a.m. ET, while Nasdaq 100 futures were flat.

In response, Treasury yields slightly increased, with the 10-year yield adding 2 basis points to 3.87% and the rate-sensitive two-year yield adding 5 basis points to 3.98%.

This comes after a strong session on Wall Street in which the SPDR S&P 500 ETF Trust SPY gained 1.6% and the Invesco QQQ Trust QQQ rallied 2.5% on Tuesday.

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