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Despite concerns about the impact of Donald Trump’s aggressive tariffs, US inflation held steady at 2.7 per cent in July. This news drove stocks higher and led traders to increase their bets on an interest rate cut next month. The S&P 500 index reached a record high, rising 0.8 per cent after the consumer price index figure was released, coming in flat compared to June’s reading and below expectations of 2.8 per cent.
The stability in inflation was attributed to weaker fuel prices, with the index for petrol decreasing by 9.5 per cent over the past year. Core inflation, which excludes volatile food and energy prices, rose to 3.1 per cent, surpassing expectations and indicating a stronger increase compared to June.
Following the data release, the US dollar and Treasury yields fell as investors anticipated a quicker pace of rate cuts by the Federal Reserve. Futures markets were pricing in a 95 per cent chance of a quarter-point cut at the next Fed meeting, compared to 85 per cent before the inflation data was released.
President Trump, who has been using tariffs to reshape US trade relationships, praised the inflation numbers as evidence that tariffs were not causing inflation or other economic problems. Despite warnings of price increases due to tariffs, the impact on consumers has been minimal so far.
However, there are signs that businesses may begin to pass on cost increases to consumers in the coming months. A small business optimism index showed that 32 per cent of companies plan to raise prices, the highest reading in over a year. Economists believe that the tariffs are starting to have an effect on inflation, especially in import-reliant categories.
The latest inflation data comes amidst pressure from President Trump on Fed chair Jay Powell to reduce interest rates. While most members of the Fed’s rate-setting committee are hesitant to lower rates until the impact of tariffs on inflation is clear, Trump is pushing for a significant rate cut.
In response to the inflation data, Trump announced that he is considering allowing a lawsuit against Powell to proceed, citing mismanagement of a Fed building renovation. The president recently appointed a new head of the Bureau of Labor Statistics, signaling a potential shift in economic policy direction.
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