Morning Market Brief September 12, 2024

US inflation rate falls in August

The US inflation rate eased further in August, setting the stage for a potential rate cut from the US Federal Reserve Board (Fed) next week. While the drop in August was encouraging, core inflationary pressures remain relatively elevated, suggesting the Fed might need to cut rates in a gradual manner to avoid overheating the economy and pushing inflation higher. Caution is still warranted as inflation remains a risk to the US economy.

• The annual inflation rate in the US dropped to 2.5% in August from 2.9% in the previous month, which matched economists’ expectations, according to a Bloomberg survey. This marks the lowest inflation rate in over three years, suggesting tighter monetary policy is helping to bring inflation back down to the Fed’s 2% target.
• Helping to pull inflation down was a drop in energy prices, which declined by 4.0% year-over-year. Prices also declined for new and used vehicles. Food price growth slowed in August compared to July. Conversely, shelter prices increased.
• The annual core inflation rate remained elevated at 3.2% in August, dragging down some of the optimism from the headline inflation number. Core inflation, which removes the price changes for volatile items such as food and energy, is seen as a strong gauge of inflationary pressures by economists.
• Markets are expecting a 25-basis-point rate cut from the Fed next week. Some market participants were expecting a larger rate cut, but still-elevated core inflationary pressures softened those expectations.

US inflation is moving closer to the Fed’s 2% target. Along with a weakening labour market and slowing economic activity, the Fed appears poised to start lowering interest rates. A rate cut could help stimulate consumer and business activity, which would also help Canada’s economy, which is highly connected to the performance of the US.

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