What economists have to say about latest U.S. inflation data

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U.S. inflation reached its lowest year-over-year level in more than three years in July, leaving economists increasingly confident that the Federal Reserve will finally cut its key interest rate in September.

The U.S. consumer price index rose 0.2 per cent from June to July, according to the latest report from the U.S. Bureau of Labor. Year-over-year prices were up just 2.9 per cent, which is down from June’s three per cent figure and marks the lowest year-over-year reading since March 2021.

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Here’s what economists had to say about the latest U.S. inflation data.

‘A bit of a mixed bag’: BMO

Scott Anderson, chief U.S. economist at the Bank of Montreal, pointed to price drops in major categories, such as new and used vehicles, apparel and air fares, as a sign that consumers were feeling stretched.

“This dovetails nicely with anecdotal reports from retailers that consumers are becoming more price-sensitive, searching for bargains and, in some cases, scaling back on purchases or trading down to lower-priced substitutes,” he said in a note.

Still, Anderson added the report was “a bit of a mixed bag” due to relatively stronger services and housing inflation, which rose by 0.3 per cent and 0.4 per cent respectively.

“Nothing in this report would keep the Fed from cutting in September, but market hopes for a bigger cut still seem like a long shot.”

Core services responsible for uptick: TD

Thomas Feltmate, director and senior economist at Toronto-Dominion Bank, said core services were mostly responsible for July’s gain in headline inflation.

Feltmate maintained in a note that with price pressures remaining “relatively subdued” in July and the labour market cooling down, TD expects three quarter-point rate cuts from the Fed by the end of the year.

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The federal funds rate is currently sitting at a range of 5.25 per cent to 5.50 per cent.

Strength in rents, just ‘noise’: CIBC

Ali Jaffery, senior economist at CIBC, noted that while rents surged by 0.5 per cent, other rental measures, such as those from Zillow and the Cleveland Fed, suggest rent prices are cooling and the data from the CPI report is just “noise.”

“We don’t expect the Fed to lose much sleep over the strong rental print today, being encouraged by the downward trend in OER (owners’ equivalent rent) as a more enduring signal of where shelter costs are headed,” Jaffery said.

“At some point, once the dust has settled, given everything we have seen on this component, we hope the BLS will sit down and ask themselves whether this is truly the best way to (measure) shelter prices in the economy.”

The Fed is ‘slowly winning’: Desjardins

Francis Généreux, principal economist at Desjardins, said the lower year-over-year inflation reading “is further evidence that the Federal Reserve is slowly winning its long fight against post-pandemic inflation.”

“Price movements have been much more encouraging in the past three months,” he said in a note. “This keeps the door open for the Federal Reserve to start cutting rates at its September meeting.”

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One more reason for Bank of Canada to cut: RSM Canada

It’s not just the Fed that could be cutting rates in the fall. Tu Nguyen, economist with RSM Canada, said in an email that the U.S. inflation data gives the Bank of Canada one more reason for a 25 basis point cut to its benchmark interest rate in September as well.

“The tide has shifted,” Nguyen said. “While the Bank of Canada and the Federal Reserve do not have to move in lockstep, the interconnected nature of the two economies means that there are advantages to them moving closely together.”

Nguyen said that the Fed reducing rates this year will also prevent the Canadian dollar from falling in value. A weaker Canadian dollar would mean imported goods could become more expensive, putting pressure on inflation.

“As inflation in both countries continues easing and is headed toward two per cent in 2025, we expect more rate cuts from both central banks,” Nguyen said.

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