Inflation Cools to 2.9%, Shoring Up Case for a Fed Rate Cut

The Consumer Price Index cooled in July compared with a year earlier, providing further evidence that inflation is moderating and leaving the Federal Reserve firmly on track to cut interest rates at its meeting next month.

Overall inflation was 2.9 percent in July on a yearly basis, the Bureau of Labor Statistics reported on Wednesday, down from 3 percent in June and slightly milder than what economists had expected.

A “core” measure that strips out food and fuel prices for a sense of the underlying trend also continued to cool.

In all, the fresh report marked an important moment in the Fed’s fight against rapid price increases. This is the first time this inflation measure has slipped below 3 percent since 2021, and while price increases are still quicker than the 2 percent pace that was normal before the coronavirus pandemic, they are much slower than the 9.1 percent peak they reached two years ago.

The inflation report likely cements the case for a rate cut at the Fed’s Sept. 17-18 meeting, economists said. Fed officials have been holding borrowing costs at 5.3 percent, the highest level in more than two decades, to slow demand and bring price increases under control. They have been tiptoeing closer to a rate cut as inflation has eased, and made it clear following their July meeting that they wanted to see just a bit more progress before making their first move.

The new data “really ticks the box,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. He said the “big question” now is how big the Fed’s reduction will be.