Cooling US Inflation Dims Hopes of Rate Hikes
US inflation continues to cool down, according to the latest report from the Bureau of Labor Statistics. The headline price index rose by just 0.1% month-on-month in July, while core inflation was up 0.2%. This brings the year-over-year rate of inflation down to 3.4% for headline and 2.5% for core.
The Fed is expected to hold interest rates steady for a prolonged period, with four key reasons contributing to disinflationary trends. Firstly, gasoline prices are likely to contribute to lower headline inflation, given the current oil price of around $83 per barrel, which historically corresponds to US retail gasoline prices below the current average.
Secondly, shelter costs, accounting for 35% of the CPI basket, are expected to exert downward pressure on overall inflation due to stretched affordability and elevated mortgage rates. Home prices are barely rising at 1%, and rents are falling in many states, according to Zillow and Realtor.com data.
Thirdly, private wage growth is rising at just 3.1% year-over-year, consistent with 2% consumer price inflation, as the labour market has balanced out with two job vacancies for every unemployed American.
Lastly, tariffs are seen as a one-off step change in prices, and their upward influence on inflation will rapidly fade as the US enters a less onerous tariff regime.