US Inflation Data Kills Hope for a Fed Rate Hike Anytime Soon

US inflation data released today showed a slowing in July for the rate of inflation in the US economy, this is a further sign of the favourable price pressures that has weakened the need for an interest rates policy change from the Federal Reserves.

The core measure of consumer price inflation which does not include energy and food, fell to 2.2%, from a previous 2.3% year on year rate in the previous month, in a report released by the labour department. Prices grew by a meagre 0.1% when compared with June. The New York Fed chief Bill Dudley on Tuesday told Fox Business Network that the markets was under-pricing the chances of a second rates hike by the Feds, he also hinted that action could be taken by the Feds possibly as soon as next month. "It's possible" for the Fed to hike rates at its Sept. 20-21 policy meeting, Dudley told Fox Business Network.

On the trail of Dudley’s statements, the financial markets was fixing a 51.4% probability of a rate hike at the Fed’s policy meeting to be held in December, higher than the previous placement of 46.7% seen on Monday, according to CME Group’s FedWatch Tool. The chances of a rates hike in September is almost gone. However the inflation data has dragged the USD lower against some major currencies. US treasuries and Stocks also experienced a decline in the moments following Dudley’s comments. The feds have also elevated their interest rate benchmark in December, a first in almost 10 years.

US consumer prices mostly maintained its previous levels in July due to the sliding cost of gasoline, but major gains in home building and industrial output signifies an uptick in US economic activities that would most likely lead the Federal Reserve to raise rates this year.

"The strong housing starts and industrial output performance will bolster the Fed confidence that growth momentum has rebounded, potentially supporting the bias for a near-term hike," said Millan Mulraine, deputy chief economist at TD Securities in New York. "Nevertheless, with inflation continuing to miss to the downside, the case for caution remains strong."

The flat CPI reading released for the US in July is the weakest since February 2016, it also follows 2 consecutive months of 0.2% increases. In the 12 months through July, the CPI grew by 0.8% after an initial rise of 1.0% in June. The Fed has a 2% inflation target and tracks an inflation measure which has been stuck at 1.6% since March.

The persistence of a rise in healthcare costs and rents, has led economists to discard all anticipations for a moderation in the underlying inflation to be maintained in July. A rise was also seen in medical care costs as they edged higher by 0.5% in addition to June’s 0.2% gain.

There might still be hope for a rate cut as John Williams, the president of the Federal Reserve Bank of San Francisco, on Monday said that “the current 2% inflation target is not well suited to an economy with a depressed natural interest rate — the rate consistent with an economy operating on an even keel”.

“There is simply not enough room for central banks to cut interest rates in response to an economic downturn when both natural rates and inflation are very low,” he also added that a higher inflation target “would imply a higher average level of interest rates and thereby give monetary policy more room to manoeuvre”.