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Market Analysis

US inflation in July is probably stable as the Fed struggles to defend higher rates: RBC
Amos Simanungkalit · 4.2K Views

11

U.S. inflation data, set for release later this week, is expected to show that inflation "held steady" in July, according to RBC's estimates. This stability is attributed to a reduction in the sources of price pressures, as the Federal Reserve faces an "increasingly difficult" challenge in justifying its higher-for-longer interest rate stance.

"We anticipate further signs of easing inflation in July," RBC stated, predicting that headline inflation remained at 3% on an annual basis, with core inflation (excluding food and energy) recording a modest 0.1% increase for the second consecutive month.

RBC noted that this trend should reassure the Fed that annual inflation rates will continue to decline as factors driving inflation have become more limited.

The Labor Department is scheduled to release the July consumer price index on Wednesday at 08:30 EDT.

RBC also highlighted that home rents, which constitute a "disproportionate share of the remaining annual price growth," are slowing as the effects of "earlier easing in market rent increases gradually filter through to lease agreements."

On the broader economic front, there appears to be little cause for the Fed to hit the panic button in response to the recent jobs-led growth scare. However, the central bank's higher-for-longer interest rate policy is becoming increasingly difficult to defend.

"Evidence is mounting that overall economic conditions have already stabilized, and inflation is likely to drift lower," RBC commented. The Fed's justification for maintaining rates more than 200 basis points above its estimated long-run 'neutral' rate is becoming "increasingly challenging."

The Fed currently considers the neutral rate—one that neither stimulates nor restrains economic growth—to be 2.5%, which is nearly 300 basis points below the current rate range of 5.25% to 5.5%, or 5.375% at the midpoint.

While a 25 basis point rate cut is anticipated for September, RBC believes that "the risks of a larger cut will depend on further downside surprises in economic growth or inflation."

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.

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