What Do the Latest Inflation Data in the US Indicate? Will There Be a Rate Cut? Here’s What Experts Think

The modest increase in prices in the U.S. in June, along with the falling cost of goods and rising cost of services, underscored an improving inflation environment that could prompt the Fed to begin cutting interest rates in September.

A report released Friday by the U.S. Commerce Department showed a slight slowdown in consumer spending last month. Signs that price pressures are easing and the labor market is cooling could boost Fed officials’ confidence that inflation is moving toward the U.S. central bank’s 2% target. The Fed will hold its next policy meeting on July 30-31.

“The question now is whether the positive momentum we’ve seen over the last three months will falter heading into the September meeting,” said Olu Sonola, head of U.S. economic research at Fitch Ratings. “The Fed is likely to use next week’s meeting to pave the way for a September rate cut, with one eye on recent developments in the labor market.”

The Commerce Department’s Bureau of Economic Analysis reported that the personal consumption expenditures (PCE) price index rose 0.1% last month after being unchanged in May.

“The improving inflation data suggests that the first-quarter increase in inflation was temporary,” said Kathy Bostjancic, chief economist at Nationwide. “Furthermore, if rental inflation has finally slowed as recent data suggests, then inflation appears to have returned to a sustainable downward trend.”

Demand in the economy has cooled in response to the Fed’s aggressive monetary policy tightening in 2022 and 2023. Economic growth averaged 2.1% in the first half of this year, while it was 4.2% in the second half of 2023.

Economists at Bank of America Securities have estimated that excess savings accumulated during the COVID-19 pandemic is about $400 billion and predict that at the current pace of destruction, it will continue through the end of the year.

“The rising savings suggest that consumers are pulling back on spending and are probably saving more for precautionary reasons,” said Veronica Clark, an economist at Citigroup. “But overall, spending appears to be slowing on lower-than-expected income. Conversely, a very low savings rate would signal the risk of a sharper downturn in spending as the labor market weakens.”

*This is not investment advice.