Inflation has remained stubbornly above the Federal Reserve’s 2% annual target, but recent economic data has stoked the view that the central bank should cut interest rates sooner rather than later.
An inflation gauge on Thursday showed that headline inflation fell from the previous month for the first time since May 2020, according to data from CME Group, and immediately prompted the market to price in around an 89% probability that the Federal Reserve will begin cutting interest rates at its September meeting, up from 75% the previous day.
The data is the latest to support the Fed’s interest rate cut.
The U.S. Bureau of Labor Statistics said Friday that the number of nonfarm payrolls in the labor market rose by 206,000 last month, beating economists’ expectations of more than 190,000. But the unemployment rate unexpectedly rose to 4.1%, from 4% the previous month, the highest level in nearly three years.
Notably, the Fed’s preferred inflation measure, the so-called core PCE price index, showed inflation easing in May. The year-over-year change in core PCE in May was 2.6%, as expected, the slowest annual rate of increase in more than three years.
“While the decline in consumer prices from May to June is unlikely to persist, the case for the Fed to begin cutting rates in September strengthens, particularly given the softening labor market,” Ryan Sweet, chief U.S. economist at Oxford Economics, wrote.
Still, the economist cautioned against “overinterpreting the decline in June’s CPI and does not believe it represents a new trend.”
Seema Shah, chief global strategist at Principal Asset Management, agreed that the latest figures “firmly point the way towards a Fed rate cut in September,” but said “a July policy cut is still off the table.”
“Not only does it raise the question, ‘What does the Fed know about the economy that we don’t?’ but the Fed still needs to gather more evidence that price pressures are weakening before it can be absolutely certain about the trajectory of inflation.”
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