Today’s inflation data provides further support for “aggressive Fed rate cuts” beginning in September, declares Preston Caldwell, chief US economist at Morningstar:

That’s likely to start with a cut of a quarter of one percentage point, Caldwell suggests, which would bring the Fed funds rate down to a 5%-5.25% range.

“Optimal monetary policy calls for a hefty reduction in the federal-funds rate in short order. Markets reflect that, with the federal-funds rate expected to drop to 3.00 to 3.25%, a cut of 200 basis points, by September 2025.

The Fed’s rhetoric is steadily shifting in this direction as well. Our base case for the upcoming September 2024 meeting is still for just a 0.25% cut, rather than the 0.5% point cut that many market participants are now expecting.

While the rise in the unemployment rate is flashing alarm signs, other labour market indicators look more benign. Not to mention, economic activity continues to expand at a solid pace for now, although we do expect a deceleration over the next year.”

How deeply might the Federal Reserve cut interest rates next month?

Nicolas Sopel, Head of Macro Research at Quintet Private Bank, reckons a smaller, quarter-point cut is more likely than a large, half-point one.

Sopel says:

Inflation worries have cooled significantly over the past few weeks, driven by easing inflation figures over the past months after it had surprised to the upside during the first part of the year. July data was no different with no upside surprises, as both consumer and producer prices came as expected or even lower than what was expected.

More notably, headline inflation printed below 3% at 2.9%, the lowest reading since March 2021, confirming expectations that the US Federal Reserve will very likely start cutting interest rates in September. Expectations for interest rate cuts have been quite rife in recent weeks with markets increasingly pricing in more rate cuts when the stock market corrected a few weeks ago.

We think a 25 basis points cut into the Fed funds rate is more likely than a 50 bps one in September. The US economy is still growing on the back of solid domestic demand. The recent weakness in the US labour data led investors to start questioning the longevity of the cycle itself and whether the Fed has held interest rates in restrictive territory for too long.

CME’s Fedwatch page suggests a quarter-point cut is a 58% chance in September, with a 42% possibility of a half-point cut.

July inflation data suggests the Federal Reserve remains on track to hit its 2% target, says James Knightley, ING’s chief international economist.

That should allow the Fed to increasingly focus on its other target of maximising US employment – by cutting interest rates in September.

Knightley has spotted one wrinkle in the inflation report, though:

The one area of real disappointment was housing with primary rents up 0.5% MoM and owners’ equivalent rent up 0.4%. Recent numbers had been tracking more in line with private surveys on housing costs, so the re-acceleration today is a surprise.

The market has seemingly moved to reduce the pricing of a 50bp cut in September on the back of this.

Wall Street has opened cautiously, as investors digest today’s US inflation report.

The Dow Jones industrial average is up five (count ‘em) points at 39,771, a gain of 0.014%, while the S&P 500 index has gained almost 0.1%.

Snacking company Kellanova is the top riser, up almost 8% after agreeing to be acquired by Mars in a $36bn deal.

This is a “Goldilocks” inflation report for the Federal Reserve, says Scott Helfstein, head of investment strategy at Global X.

“With CPI inflation at 2.9%, the Fed is getting closer to their goal. …

This is further evidence that consumers are re-anchoring inflation expectations in line with the Fed mandate.”

It looks like the US is winning the war on inflation, reports The Washington Post’s Heather Long:

Inflation is also running below nominal pay increases, meaning real pay is rising.

Digging into the US inflation report, we can see that food prices rose by 2.2% over the 12 months to July.

Energ costs rose by 1.1% on an annual basis, with gasoline prices – an important issue for American drivers – flat month-on-month, and 2.2% lower than a year ago.

Used car and trucks were 10.9% cheaper than a year ago.

Clothing prices dropped on a monthly basis.

But shelter costs rose by 0.4% in the month, and were 5.1% higher than a year ago.

There’s a clear message in today’s US inflation report for the Federal Reserve, says Richard Flynn, managing director at Charles Schwab UK – it’s time to get cutting.

Flynn explains:

“Today’s figures show that the rate of inflation has fallen compared to last month. This drop reinforces the message that recent labour figures have made clear to the Federal Reserve: it’s time for interest rates to fall.

“While investors have begun to price in a rate cut at the September meeting, we have seen dramatic moves in the market this month – volatility that reflects residual uncertainty about the outlook for the market. Although today’s lower CPI reading is another convincing piece of evidence in favour of less restrictive monetary policy, we expect that the market will remain highly sensitive to economic data releases until a September slash is locked in.”

Core inflation in the US has also fallen, which will cheer policymakers at the Fed.

Core inflation (stripping out food and energy) rose by 3.2% in the year to July, the smallest 12-month increase since April 2021.

Analysts at BNP Paribas do believe that today’s inflation report keeps a September interest rate cut on the table.

They say:

• This week’s UK inflation and labour market data leave a September cut squarely on the table, in our view and indeed, it remains our base case.
  

• In particular, we think the MPC will view the material downside surprise relative to its expectation on services inflation as evidence supporting its ‘benign’ view on inflation persistence.
  

• However, September’s meeting is still finely balanced in our view. Data remain volatile, while the MPC’s reaction function continues to be unclear, as does its composition following Jonathan Haskel’s departure.

Mars, the chocolate to pet food group, has struck a $36bn deal to buy Kellanova, the maker of Pringles and Pop-Tarts.

The all-cash offer is be the biggest ever acquisition for the privately owned Mars, dwarfing its $23bn takeover of the chewing gum maker Wrigley in 2008.

The deal could attract scrutiny from competition watchdogs as it would bring together well-known consumer goods brands including Mars’ Twix, Bounty and Milky Way with Kellanova’s Pringles, Special K cereal and Carr’s water biscuits.

However, experts have said that the limited overlap between the two companies’ products means the deal is likely to be given the green light.

The euro has hit a seven-month high against the US dollar today, as traders anticipate a soft US inflation report in under 30 minutes.

The single currency has hit $1.1023, its highest level since the start of January.

Professor Costas Milas, of the University of Liverpool Management School, tells us why the Bank of England could cut rates again in September:

The BoE has repeatedly mentioned services inflation to justify why MPC members did not cut interest rates earlier. I plot below ‘price surprises in services inflation’ (proxied by the four-quarter difference in services inflation).

Historically, services inflation moves much faster on the way down than on the way up. This plot is telling me that, everything else equal, there is a good reason for MPC members to cut interest rates in September!

The “encouraging drop” in services inflation in July may increase the probability of further rate cuts from the Bank of England in September, argues the NIESR economic research institute.

They say:

The significant fall in services inflation to 5.2% will have surprised the Bank of England who expected it to remain around 5.7%.

This, alongside the fall in core inflation to 3.3%, is a strong sign that underlying inflation dynamics are easing.

However, NIESR adds that there are reasons to be cautious…

Strong wage growth, coupled with still high core and services inflation, may mean the Bank could exercise some caution with regards to further rate cuts. Furthermore, the potential increase in the energy price cap in October could increase inflationary pressures.

Although UK inflation picked up in July, it remains lower than in other major European economies.

Inflation in both France and Germany was clocked at 2.6% in July, on an EU-harmonised basis.

However, inflation was 2.3% in both France and Germany according to their own national calculations.

The latest US inflation data is due at 1.30pm UK time today; economists predict US CPI was unchanged in July at 3%.

The headline rate of UK inflation looks set to “tick up mechanically” over the rest of the year.

So predicts Gabriella Dickens, G7 economist at AXA Investment Managers, who says “the tailwind from energy prices” will continue to ease.

That tailwind is caused by energy prices having fallen so sharply in 2023, meaning any further drops this year are smaller.

For example, Dickens explains, Gas and electricity prices fell by a smaller 7.8% and 6.8% respectively in July 2024, than in July 2023, 25.3% and 8.6%, leaving energy price inflation at -20.1%, compared to around 27% over the past three months.

Earlier this month, the Bank of England also predicted that inflation would rise through 2024, from its 2% target (in May and June) to around 2¾% at the turn of the year.

Over in the eurozone, we have confirmation that its economic growth remained steady this spring.

Eurozone GDP rose by 0.3% in April-June, statistics body Eurostat reports, which confirms the ‘flash’ estimate released at the end of July.

That follows 0.3% growth in January-March, after stagnation in the second half of last year.

France grew by 0.3%, while Germany’s GDP fell by 0.1% – putting the eurozone’s largest member on the brink of recession.

Although City traders have raised their bets on a UK interest rate cut next month, there aren’t many economists predicting a cut as early as September.

ING developed markets economist, James Smith, predicts there will be two more interest rate cuts by Christmas, but probably later in the year than September:

He says the Bank of England will take a closee look at the slowdown in services inflation in July:

On the face of it, that looks like very welcome news which in theory, you might expect could speed up the process of lowering rates. Remember that services inflation is the main guiding light for Bank of England policy these days. But dig into the details and we suspect the Bank will be taking these figures with a pinch of salt.

“Much of this looked like noise and the BoE itself concluded that these upside surprises didn’t tell it much about the trajectory of inflation over the medium-term. Indeed, we replicated a measure of “core services” inflation, put together by the Bank of England, which excludes various items like rents and airfares, and we additionally took out hotels given the recent volatility. Back in June, this measure showed that services inflation had fallen back more aggressively than the headline metric, once those components were removed.

“Our metric of core services inflation was unchanged at 5.1%. In other words, just as the upside surprises of recent months looked like noise, it’s only fair to conclude that the same is true of this latest sharp fall in services inflation as well. We suspect that’s the conclusion the Bank is likely to reach too. That said, we still think the news on services inflation is likely to gradually improve as the year wears on. Surveys show firms are raising prices much less aggressively than they were. And that should help unlock at least one rate cut in November, and we suspect another in December. We suspect the Bank will pause at the next meeting in September.”

The smaller-than-expected rise in UK inflation in July could calm jitters over whether the Bank of England was right to cut interest rates at the start of this month.

Anthony Codling, analyst at RBC Capital Markets, told clients:

CPI in July was higher than in June, but lower than expected, which may comfort those who were nervous about the Bank Rate cut earlier this month.

We believe that the scene is set for further cuts in Bank Rate before the year is out and that falling mortgage rates will usher in a robust autumn selling season once the summer holidays draw to a close.

Today’s inflation data could mean that UK rail fares rise by 3.6% next year… but the government insists no decision has been made yet.

Annual rail fares have historically been based on July’s change in the Retail Price Index – a rather discredited inflation measure, which has lost its status as an accredited official statistic.

RPI rose by 3.6% in the year to July, the Office for National Statistics reported this morning.

The Government is planning to announce fare rises later this year, and a Department for Transport spokesman has said that the government wants to make prices ‘as affordable as possible’.

“The Transport Secretary is delivering the biggest overhaul of our railways in a generation, to provide better services for passengers, while saving millions of pounds in fees paid to the private sector.

“No decisions have been made on next year’s rail fares but our aim is that prices are as affordable as possible for passengers.”

Nearly half the fares on Britain’s railways are regulated by the Westminster, Scottish and Welsh Governments, including season tickets on most commuter journeys, some off-peak return tickets on long-distance routes, and flexible tickets for travel around major cities.

Train operators set rises in unregulated fares, although these are likely to be very close to changes in regulated ticket prices.

Seperately in the rail industry, there are hopes that a deal will be struck today betweenn the train drivers’ union, Aslef, and the government, to end long-running strike action.

Today’s inflation figures showed the cost-of-living crisis had not ended, points out Liberal Democrat Treasury spokeswoman Sarah Olney:

“Today’s figures are a stark reminder that the cost-of-living crisis is far from over. Years of Conservative chaos have devastated families up and down the country as countless people are still paying the price of Conservative mismanagement.

“From mortgage payments and rail fares to the cost of food in supermarkets people are feeling a hangover from hell all thanks to successive Conservative prime ministers.

“The Government needs to tackle the cost-of-living crisis head-on, starting by investing in our farmers to bring down food prices, saving families money by expanding free school meals to all children in poverty and implementing a one-year freeze to rail fares.”

Monica George Michail, associate economist at the NIESR, reckons the Bank of England will show ‘some caution’ about cutting interest rates soon:

“Today’s small rise in inflation is driven mostly due to the large price drops in gas and electricity last year falling out of the calculation. This will be a consistent feature over the next few months, with inflation hovering around the 2 per cent target, before coming back to target in early 2025.

On the other hand, underlying inflationary dynamics continued to slow with core inflation at 3.3 per cent and services inflation at 5.2 per cent. Despite the lower figures, these remain elevated and may lead the Bank of England to exercise some caution with regards to further interest rate cuts.”

Darren Jones, chief secretary to the Treasury, has responded to the rise in inflation, saying:

“The new Government is under no illusion as to the scale of the challenge we have inherited, with many families still struggling with the cost of living.

“That is why we are taking the tough decisions now to fix the foundations of our economy so we can rebuild Britain and make every part of the country better off.”

Two more UK interest rate cuts this year are possible, agrees Pierre Roke, associate at Validus Risk Management, after this morning’s inflation report:

“After bottoming out at 2% over May and June, UK inflation, as expected, is back on the rise - coming in at 2.2%.

“Following the Bank of England’s narrow 5-4 vote to deliver their first cut, the market has been hanging on each announcement and data point for guidance on future rate cuts. This heightened attention is evident in the one-month GBPUSD volatility, which has surged to 6.75%, nearing year-to-date highs. However, since stating they would remain data dependant, the BoE have been radio silent, leaving the market only with economic data to gauge next steps.

“Today, markets had a keen interest in services inflation – after two consecutive months of hotter-than-expected readings at 5.7%, the hawkish Bank of England committee members, who voted to hold, highlighted this as a critical factor, making it a key market signal. Today’s 5.2% print vs 5.5% expected print validates the more dovish committee members and potentially leaving room for not just one more cut this year but two.”

Although inflation has picked up, we’re a long way from the dark days of October 2022, when prices were soaring by 11% per year.

Encouragingly, UK manufacturers raised their prices at a slower rate in July.

The latest survey of producer prices shows that prices at the factory gate rose by 0.8% in the year to July 2024. That’s down from 1.0% in the year to June 2024.

Factories were hit by a small increase in costs – input prices rose by 0.4% in the year to July 2024, having been flat in June.

On a monthly basis, the CPI inflation rate fell by 0.2% in July 2024, compared with a fall of 0.4% in July 2023.

A rise in inflation to 2.3% (if it happened) shouldn’t create ‘panic stations’ at the Bank of England, argues Steve Matthews, investment director, liquidity at Canada Life Asset Management.

Wage data continues to fall and unemployment remains above recent lows.

The Monetary Policy Committee (MPC) have indicated that they fully expect bumps in the road along the way and, although this data will be a cause for wariness, it shouldn’t deter them from cutting borrowing costs in the near future.

There are hopes that UK core inflation (stripping out food and energy costs) could have dipped in July.

Julien Lafargue, chief market strategist at Barclays Private Bank, says:

“On a year-on-year basis, we expect UK headline inflation to have increased in July driven by the sharp decrease in energy prices a year ago.

Encouragingly, core prices should have moved in the opposite direction with a slight moderation in July, driven by a modest improvement in services inflation.”

“Overall, the path of slow and gradual disinflation remains intact, in our view. As a result, we continue to expect the Bank of England to wait before cutting interest rates again, with a move potentially in November rather than in September.”