The recent data on American annual headline inflation showed a decrease in the Consumer Price Index (CPI) for the first time in over four years. This decline was primarily driven by lower energy prices, although other sectors such as shelter, vehicles, and transport also played a role. Surprisingly, food inflation saw a slight increase during this period.
The Federal Reserve has made it clear that it is monitoring inflation closely and will only consider loosening its monetary policy if there is sustained evidence of inflation dropping towards the target rate of 2%. However, as of early 2023, the downward trend in inflation seems to have stalled, with the headline figure remaining at or above 3%.
According to the CME FedWatch Tool, market participants are now expressing a high level of certainty that the Fed will implement at least one rate cut by its meeting on 18 September. The probability of two rate cuts by the end of the year is also significant, standing at around 88%. These figures have seen a slight increase following the latest inflation data release.
Despite the high likelihood of monetary loosening by the Fed, there are still uncertainties surrounding future inflation trends. With two more releases of the Consumer Price Index before the September meeting, there is a possibility that unexpected inflation spikes could alter the probabilities for rate cuts.
The recent data on American annual inflation trends paints a complex picture of the economy. While certain sectors are experiencing price decreases, others are seeing slight increases. The Federal Reserve’s response to these trends is closely watched by market participants, who are preparing for potential rate cuts in the near future. As we await further data releases, it remains to be seen how inflation will evolve and how the Fed will adjust its policy in response.