US inflation slows to 2.9pc in July, 3-year low

US inflation slowed in July to the lowest since March 2021, a sign of decelerating pricing pressure that point to a likely cut in borrowing costs by the Federal Reserve next month.

The consumer price index (CPI) slowed to an annual 2.9pc in July from 3pc in June and 3.3pc in May, the Bureau of Labor Statistics reported today. So-called core inflation, which strips out volatile food and energy prices, rose by 3.2pc in July, the smallest gain since April 2021.

After the report, the CME's FedWatch tool signaled a 58.5pc probability that the Fed will cut its target rate by a quarter point in September from 47pc odds Wednesday. Probabilities of a half point cut fell to 41.5pc from 53pc the prior day, suggesting underlying signs of stubborn inflation in the details of today's report.

The energy index rose by an annual 1.1pc in July, accelerating from 1pc in June, while the gasoline index contracted by 2.2pc in July compared with a 2.5pc contraction in June. Energy services rose by an annual 4.2pc, slowing from 4.3pc the prior month.

Food costs rose by 2.2pc in July, matching the prior month. Shelter rose by 5.1pc in July, easing from 5.2pc the prior month. Transportation services rose by 8.8pc in July following a 9.4pc gain in June.

After falling to 3.1pc in January, inflation had reaccelerated to as high as 3.5pc in March as job growth and other economic data had come in stronger than expected. That prompted the Federal Reserve to hold off on widely expected rate cuts after hiking its target rate to a 23-year high of 5.25-5.5pc in July 2023 and holding it there since, saying it needed "greater confidence" that inflation was easing to its 2pc target.

The Fed, in its June policy meeting, penciled in one likely quarter-point cut this year, down from three signaled in March. But a weaker than expected employment report for July early this month had prompted an equity market downdraft last week on recession concerns and fears the Fed had been too slow to begin cutting rates.

CPI rose by a seasonally adjusted 0.2pc in July after a 0.1pc gain in June. Core CPI was up by 0.2pc for the month after a monthly gain of 0.1pc in June.

By Bob Willis