Inflation remains cool, clearing way for Fed interest rate cut

Inflation rose at a temperate pace in July, cementing thoughts of interest-rate cuts by the Federal Reserve, according to economic data released on Friday.

Wall Street applauded the development, with stock futures adding to their gains after the Commerce Department reported prices increased 0.2% in July from June. Inflation held steady from a year ago at 2.5%. The gauge increased 1.7% on a three-month annualized basis, the slowest in 2024.

Excluding volatile food and energy costs, so-called core inflation rose 0.2% in July from June. Over a year, core prices gained 2.6%. Economists tend to see core prices as offering a better assessment of future inflation trends.

The figures show inflation is steadily fading after three years of surging prices battered household finances for many. According to the measure reported Friday, inflation peaked at 7.1% in June 2022, the highest in four decades.

Personal spending rose 0.5% in July from a month earlier, while personal income rose 0.3%, potentially calling into question the sustainability of American buying habits going forward.

Even as the days of elevated inflation appear to be numbered, many Americans are less than pleased with today's much higher costs for gas, food and housing in contrast to their pre-pandemic levels.

Fed Chair Jerome Powell said last week that "the time has come" for the central bank to adjust its monetary policy , with economists penciling in a reduction at the Fed's September 18 meeting.

Friday's numbers help in furthering the view that the U.S. economy is gliding toward a soft landing whereby growth stays robust and inflation subsides.

"Inflation continues to slow and the latest data is more evidence the Fed sees success in their line of sight," said Elizabeth Renter, senior economist at NerdWallet.

Still, the Fed is also concerned with maintaining a healthy jobs market in which layoffs and unemployment don't rise significantly, a scenario Renter believes is still possible.

"Next week will provide greater insight into that second piece of the puzzle, though, and will help determine the size of the near-certain rate cut," Renter added of the August jobs report, scheduled for release next week. A recent downward revision to job additions for the 12-month period ending in March furthered the idea of a slowing labor market, and could serve to seal the Fed's plan to start cutting rates soon.

"A 25 basis point interest rate cut is pretty much set in stone in September, but the Fed will still hope the jobs report next week does nothing to pile on the pressure for a 50 basis point cut," Olu Sonola, head of U.S. economic research at Fitch Ratings, stated.

—The Associated Press contributed to this report.