US consumer inflation cools more than forecast to 2.5% in August

WASHINGTON - The headline rate of US consumer inflation eased more than expected in August, according to government data published on Sept 11, bolstering expectations that the Federal Reserve will cut interest rates next week.

A rate cut by the US central bank would act to boost demand in the world’s largest economy. That would give the Democratic Party some good economic news to run on, going into the final stretch of the 2024 presidential election.

The consumer price index slowed to 2.5 per cent in August from a year ago, down from 2.9 per cent in July and the lowest annual figure since February 2021, the Labour Department said in a statement.

This was slightly below the median forecast of economists surveyed by Dow Jones Newswires and The Wall Street Journal.

Monthly inflation picked up by 0.2 per cent, in line with expectations.

“Today’s report shows that we are turning the page on inflation,” White House national economic adviser Lael Brainard said in a statement.

“With inflation coming back down close to normal levels, it is important to focus on sustaining the historic gains we have made for American workers during this recovery.”

Despite the good news on the headline rate, a measure of inflation that strips out volatile food and energy costs was largely unchanged on an annual basis, and rose by a larger than expected 0.3 per cent from a month earlier, indicating that underlying inflation remains sticky.

“It still seems that some of the inflationary pressures are still related to what we would call catch-up inflation,” Mr Bernard Yaros, Oxford Economics’ lead US economist, told AFP.

He pointed to a 0.6 per cent rise in motor vehicle insurance and the ongoing stickiness of the housing indexes. “This is not necessarily something the Fed can cure right away,” he added.

Cementing a smaller cut

Alongside the ongoing slowdown in consumer inflation, the Fed’s favoured inflation measure known as the personal consumption expenditures price index has also eased towards the central bank’s long-term 2 per cent target in recent months. The labour market has also cooled.

Against this backdrop, Fed policymakers have shifted attention from inflation to the unemployment part of the central bank’s dual mandate, and indicated that rate cuts are on the way.

“The time has come for policy to adjust,” Fed chairman Jerome Powell said in August.

“The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks,” he added.

A Fed rate cut next week will thrust the independent US central bank into the middle of the political debate less than two months before November’s presidential election, in which the economy remains a top issue for voters.

Policymakers have been clear that the timing of rate cuts will be based on the economic data, not political considerations.

Nevertheless, a September cut could irk the Republican candidate and former US president Donald Trump, who has previously suggested without evidence that Mr Powell – whom he first nominated to run the Fed – was displaying political favouritism towards the Democratic Party.

Investors will now turn their attention to the Fed rate decision, to be announced on Sept 18.

Futures traders are certain that the Fed will cut rates next week, but are not yet certain about the size of it, according to data from CME Group.

They assign a probability of around 85 per cent that the Fed will cut by a quarter percentage point, and a 15 per cent chance that it will enact a half-point cut.

“This report, in and of itself, is not going to deter the Fed from cutting rates,” Mr Yaros said, adding that it likely reduces the chance of a half-point cut.

“Our forecast is for a rate cut in September and December,” he added. “But we have to see what the Fed says next week in their meeting.” AFP