Consumer prices have been steady, but July data on U.S. inflation shows surprisingly lowering rates despite the previously high readings that would’ve originally suggested otherwise. This report is also good news as it can support the case for an interest rate cut from the Federal Reserve by September.
To understand this we have to go a couple of years back to when inflation was at a peak during 2022 at a high of a staggering 6.5%. Many economists and analysts believed it would take a moderately severe recession to reset this to the Fed’s target baseline of around 2%.
As of late, our country has defied these beliefs and inflation has been lowering at a fairly consistent rate from then on. It has decreased from the high 6.5% in 2022 to 3.7% in 2023 and averaging around 2.4% in 2024. If rates stay consistent, it is believed we could average over 1.8% from 2025 onward.
While this inflation has been lowering, the U.S. and even the global economy are expected to avoid any proper recessions from occurring though slightly lower GDP growth is predicted.
How rates of inflation have been decreasing
Supply and demand levels have been normalizing, with consumer prices decreasing by 0.1% on average from May to June 2024. The inflation rate for commodities saw its sharpest decline in six months, driven by decreased demand amid persistent high inflation. This weakening demand has contributed to price stabilization.
A key factor in this decline is the significant drop in energy prices, particularly gasoline, which has fallen by 22% on average. Overall energy prices have decreased by 17% from 2022 to July 2024, easing transportation costs and reducing broader economic pressures. This shift has helped to stabilize prices across the economy.
Federal rate cuts?
Federal chair, Jerome Powell has stated that we are seeing “considerable progress” in slowing inflation towards the central bank’s target. Still, he stated that the central bank needs to see more effective data to have the confidence necessary to cut their benchmark interest rates from it’s current two decade high of 5.3%. A further acceleration in prices combined with the softened labor market conditions in the U.S has kept the doors open wide for possible federal rate cuts by the September meeting.
The Fed is aiming to see similar patterns in market conditions in August and September before dropping the hammer on the first rate cut.
Written by Aniruddh Sajan
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