Inflation dips more than expected in July, setting up for Fed rate cut next month

The Labor Department’s monthly Consumer Price Index dipped below 3% for the first time in over three years in July with the average prices on goods and services up 2.9% on an annual basis last month.

Data from the Wednesday report will serve to bolster an interest rate cut decision by the Federal Reserve at its September policy meeting, a move already signaled by Fed Chairman Jerome Powell last month. The monetary body’s benchmark federal funds rate has been locked into the 5.25% to 5.5% range since last July, the highest in decades and part of a strategy to chill down a U.S. economy that saw inflation peak at 9.1% in June 2022, a 40-year high.

Core inflation for July, which strips out volatile food and energy costs, rose 3.2% over the last 12 months and was the smallest annual increase in that index since April 2021. While overall prices were up 0.2% from June to July, the biggest driver of July inflation was the cost of shelter, which moved up 0.4% on a monthly basis. Changes in housing-related costs have an outsize impact on the CPI reading as they account for over one-third of the calculation.

Mountain West states, including Utah, saw regional inflation in July come in well below the national average with prices on consumer goods and services up 2.0% over the past year.

The Fed’s two-part policy mandate of supporting price stability and maximum employment has been skewed heavily toward the inflation metric for the last few years, but a recent, unexpectedly bleak jobs report has pulled more focus toward the employment realm.

U.S. businesses added 114,000 new, nonfarm payroll jobs in July, according to a report released earlier this month by the U.S. Department of Labor, falling far short of the 175,000 expected by many economists and trailing well behind the 217,000 new jobs per month average over the past year. The annual unemployment rate hit 4.3% in July, its highest level since October 2021 and up from June’s 4.1%. The Labor Department’s July Employment Situation Summary found the number of unemployed people increased by 352,000 to 7.2 million last month. The new data reflects a significant rise in U.S. unemployment from 12 months ago, when the jobless rate was 3.5% and the number of unemployed people numbered 5.9 million.

At the state level, Utah’s unemployment rate has also been on the rise, though it’s tracking at a much lower rate than the national average. The latest data from the Utah Department of Workforce Services found the state’s unemployment rate came in at 3.0% in June, up one-tenth of a percent from May. Utah’s July employment numbers are due out later this month.

Will the Fed cut interest rates?

While in no way guaranteeing a rate reduction will come at the Fed’s September meeting, Powell offered some foreshadowing of its likelihood, pending any unforeseen economic wobbles.

“We have made no decision about future meetings,” Powell said at the conclusion of the Fed’s July meeting. “The broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate.”

Powell told reporters the Fed is closely monitoring the U.S. labor market and noted that “if we see something that looks like a more significant downturn, that would be something that we would have the intention of responding to.”

While a series of steady U.S. inflation downticks over the second half of 2023 had spurred the Fed to signal late last year it could assess multiple federal lending rate cuts in 2024, inflation headed back up early this year and forced the monetary body to recompute. Now, it appears likely just a single rate cut will occur before the end of the year.