US inflation fall paves way for interest rate cut

Inflation in the United States cooled last month, leaving the US Federal Reserve poised to cut interest rates for the first time in four years next week.
Figures from the US Bureau of Labor Statistics revealed that prices growth in the world’s largest economy had dropped to 2.5 per cent on an annual basis in August, from 2.9 per cent in the previous month, slightly below Wall Street forecasts. Inflation is now at a three-year low.
On a monthly basis, prices growth remained unchanged at 0.2 per cent. Core inflation, which is closely watched for clues on the strength of underlying price pressures, jumped to 0.3 per cent from 0.2 per cent, exceeding projections.
Traders trimmed their bets on a Federal Reserve rate cut next Wednesday from a larger 0.5 per cent to 0.25 per cent after the release of August’s inflation data and they now see an 85 per cent chance of a quarter-point reduction from the current range of 5.25 per cent to 5.5 per cent, according to CME Group’s Fed Watch tool. Cuts worth 1 per cent are priced in for the remainder of the year.
On Wall Street indices opened sharply lower on the latest inflation data but by the close of trading in New York the losses had been pared, or in the case of the technology-biased Nasdaq overturned with a gain of 1.6 per cent to 17,301.74. The S&P 500, Wall Street’s benchmark share index, was down 1.5 per cent at 5,415.29. The pound weakened against the dollar by 0.1 per cent to $1.3093. The yield on the benchmark ten-year US government bond inched up to 3.67 per cent.
“The likelihood of a 0.5-percentage-point cut from the Fed next week has taken a big knock with this [core inflation] number, but it won’t be enough to stop the Fed cutting at all,” Neil Birrell, chief investment officer at Premier Miton Investors, said. “They are still walking a tightrope between beating inflation and maintaining growth, which will mean that more moderate policy measures will prevail for now.”
The Fed is the last of the big central banks to have kicked off its monetary policy loosening cycle. The Bank of England cut Britain’s borrowing costs by 0.25 per cent on August 1, the first reduction since March 2020, while the European Central Bank started relaxing its policy in June and could do so again on Thursday.