US on track to curb inflation: Federal Reserve seems determined to hold rate hikes

Inflation battles: Prices in the US rose 3.2% year on year in July, up slightly from the 3% recorded in June but slightly below the 3.3% forecast by economists

The US appeared to have finally calmed inflation as prices rose less than expected last month.

Prices in the US rose 3.2 percent year on year in July, up slightly from the 3 percent recorded in June, but slightly less than economists’ forecast of 3.3 percent.

Core inflation, which excludes the volatile costs of things like food and energy, also slowed to 4.7 percent in July from 4.8 percent, a relief to many US policymakers as the figure had proved more persistent than headline inflation.

The figure of 3.2 percent is well below the peak US inflation rate of 9.1 percent reached last summer and is moving steadily closer to the Fed’s target of 2 percent.

It is also less than half the rate recorded in the UK, where inflation remains stubbornly high.

The United Kingdom is set to release its July inflation pressures next Wednesday and analysts have forecast a drop to 6.8 percent, still well above America and the Eurozone’s 5.5 percent.

Recent increases in fuel and gasoline prices in the US have been among the main drivers of the rising inflation, although huge reserves of domestic energy, such as shale oil, have kept the country relatively isolated from the global price swings caused by the Russian invasion from Ukraine.

The rating will bring relief to the Federal Reserve and Chairman Jerome Powell. It also raised hopes that the US central bank will opt to keep interest rates stable at its meeting next month.

David Henry, investment manager at Quilter Cheviot, said the July numbers are likely to boost markets as the Fed “would now have enough coverage to hit the pause button on rate hikes.”

Traders are now almost certain that the US Federal Reserve will keep interest rates at the current 5.25-5.5 percent, with more than 90 percent predicting the status quo will be maintained.

“It seems more and more that the Fed has done a good job, at least for now. While we could see inflation rising again, the markets will give them the thumbs up in the near term,” said Neil Birrell, chief investment officer at Premier Miton.

The dollar weakened as traders priced in fewer rate hikes, with the pound briefly rising above $1.28, while yields on two-year US Treasury bonds, which are sensitive to interest rates, fell about 0.03 percent.

The lower-than-expected inflation numbers followed last week’s data that showed the US job market was cooling after the Fed raised rates to its highest level in more than two decades.

The prospect of a pause in rate hikes triggered a rally in stock markets, with the Dow Jones Industrial Average rising 53 points, the S&P 500 gaining one point and the Nasdaq rising 1.75 percent.

London markets also got a boost with the FTSE 100 rising 31 points, or 0.4 percent, while the FTSE250 added 0.3 percent, or 57 points, to just under 18,994.

But the data highlights the growing divide between the US and the UK.

The Bank of England has already raised interest rates 14 times in a row and is expected to raise at least two more before the end of the year, peaking at just under 6%.

UK inflation is expected to remain above the Bank’s own target of 2 per cent for at least another year, with forecasters predicting that price increases will not reach that level until “early 2025”.

But analysts also warned that a pause in rate hikes across the Atlantic did not mean the Fed would cut rates any time soon.

“While inflation is moving in the right direction, the still high level suggests the Fed is still a long way from cutting interest rates,” said Seema Shah, strategist at Principal Asset Management.

“Indeed, disinflation is not likely to be smooth and will take some additional economic pain before the 2 percent sustainable target comes into view,” she added.