US Inflation Report Sparks Doubts Over Fed Rate Hikes

The latest US inflation report has come in lower than expected, further solidifying doubts about the Fed's plans to raise interest rates. The headline inflation rate rose by just 0.1% month-over-month in July, while core inflation remained at 2.5%. This brings the year-on-year rate of inflation down to 3.4%, from 3.5% previously.

The cooling inflation trends are expected to continue due to several factors. Gasoline prices have fallen by 2.9% month-over-month, which is historically consistent with lower US retail gasoline prices. Additionally, the shelter component, accounting for 35% of the basket of goods and services, is experiencing downward pressure due to high housing costs and elevated mortgage rates.

The cost of workers is also no longer a major concern for US corporates, as the labour market has become more balanced. Private wage growth is rising at just 3.1% year-over-year, consistent with 2% consumer price inflation. Furthermore, tariffs, which represent a one-off step change in prices, are expected to have a rapidly fading upward influence on inflation.

The authors of the report conclude that the Fed will likely hold rates steady for an extended period, well into 2027, given the disinflationary trends and benign market expectations.