Inflation cools to below 3%, paving the way for possible Fed rate cuts

Inflation in the US showed promising signs of easing in July, with the Consumer Price Index (CPI) falling below 3% for the first time in over three years. The unexpected slowdown in price increases could prompt the Federal Reserve to cut interest rates as early as next month. This could lower borrowing costs and boost economic growth.

According to the Bureau of Labor Statistics, consumer prices rose 2.9% last year, which is less than the 3% annual increase in June. On a monthly basis, prices rose 0.2%, offsetting a slight 0.1% decline in the previous month. The main reason for this increase was housing costs, with the housing index rising 0.4%, accounting for nearly 90% of the total monthly increase.

Economists had expected a monthly increase of 0.2% and an annual increase of 3%, according to FactSet consensus estimates. Meanwhile, the core CPI, which excludes the volatile food and energy categories, also rose 0.2% since June, with its annual rate slowing to 3.2% from 3.3% – the lowest rate since April 2021. Various financial experts said these figures suggested that the rise in inflation seen earlier this year is starting to ease.

This latest report builds on the positive data from June, in which the headline Consumer Price Index (CPI) declined for the first time since April 2020. The steady cooling of inflation has given the Federal Reserve and financial markets increasing confidence that the worst of inflationary pressures may be behind us.

The Federal Reserve, however, has been cautious, waiting to cut interest rates until there were clearer signs of sustained progress in containing inflation. However, recent developments in the labor market, including a weaker-than-expected July jobs report – which saw only 114,000 new jobs added and unemployment rising to 4.3% – have changed the picture.

Financial experts said these labor market weaknesses have reignited fears of a potential recession, leading to heightened expectations that the Fed could begin cutting interest rates as early as next month. A reduction in interest rates would provide much-needed relief to borrowers, particularly those with mortgages, credit cards and auto loans. Analysts expect the Fed will likely start with a modest rate cut, perhaps by about 0.5 percentage points.

Even as possible rate cuts loom, experts believe that high-yield savings accounts, which currently offer some of the best rates at up to 5.35%, will remain attractive. Certificates of deposit (CDs), which are popular in the high-yield environment, could still offer attractive returns. However, financial experts advise caution when locking in high-yield CDs for the long term ahead of possible rate cuts.

As the Fed's decision draws closer, consumers are being advised to focus on paying down their credit card debt to secure better loan terms. According to the Mortgage Bankers Association, mortgage rates, which currently average 6.55% for a 30-year fixed loan, have already led to a 16% increase in refinancing demand. A potential Fed rate cut could lower mortgage rates even further, making now a good time for homeowners and prospective buyers to consider refinancing.

The auto sector also saw fluctuations. The average interest rate on new car loans was 9.72% in July, down from 10% in June but still higher than a year ago. The average monthly auto loan payment rose slightly to $727. As dealers clear out inventory for new models in the coming months, there may be opportunities for consumers to take advantage of discounts.

President Joe Biden responded to the July inflation report, highlighting progress in controlling inflation. “Today's report shows that we continue to make progress in fighting inflation and reducing costs for American households. Inflation has fallen below 3% and core inflation is at its lowest level since April 2021. While there is more work to do, we are seeing real progress: wages have been rising faster than prices for 17 consecutive months,” Biden said.

The president also criticized high prices charged by large corporations despite record profits and emphasized ongoing efforts to reduce costs for American families. “We are fighting the pharmaceutical industry to lower prescription drug prices, we are cutting red tape to build more housing, and we are fighting price gouging to lower everyday costs from groceries to air travel,” Biden added. He contrasted these efforts with Republican proposals that he said would raise prices for middle-class families while cutting taxes for the rich and large corporations, and pledged to continue fighting for economic progress.

“While they try to take us back, we will fight for the future,” Biden said.