US - The US Consumer Price Index (CPI), a key indicator of inflation, fell to 2.5 percent in August, setting the stage for the Federal Reserve, the country's central bank, to possibly start cutting interest rates at its next meeting in September.
Evidence that inflation is moving towards the central bank's 2% target is welcome news for policymakers and the average US household, as the cost of living has finally fallen.
With price levels in the US falling to a three-year low, it is high time for Fed officials to reverse their policy of tightening monetary policy or the country's labour market and the economy as a whole will be at risk under the pressure of higher interest rates. Rates are currently at a 23-year high of 5.25 to 5.5 percent.
The CPI data represents one of the last major economic indicators released ahead of next week's important Federal Reserve meeting and paves the way for an expected quarter-percentage point cut in benchmark rates. In July, the CPI reading was 2.9 percent.
"The time has come (for a policy change)," Federal Reserve Chairman Jerome Powell announced at a major US monetary policy forum last month. From July's 2.9 percent to August's 2.5 percent, U.S. inflation is indeed on a "sustainable path" back to normal.
High interest rates act as a brake on the economic engine, as staggering borrowing costs will restrict businesses and households from applying for bank loans, causing a slowdown in economic activity. The world's central banks have always sought a so-called "soft landing" for a stressed economy, where inflation is contained while recession is avoided.
But achieving a "soft landing" is never easy. Currently, investors around the world are "nervous" until the Federal Reserve agrees to cut rates next week. Although most expect a quarter-percentage point cut, the case for a half-percentage point cut is palpable.
The US labour market is no longer strong. There are signs that people who need jobs are having more difficulty getting them, and the number of Americans considered long-term unemployed - those who have been out of work for more than six months - has risen. In surveys, workers say they are less confident than in 2023 that they can quickly get a new job if they lose their job.
Last month's lacklustre labour market report sparked fears of an imminent economic downturn, causing the US stock market to plummet into a furious sell-off. Since then, criticism has mounted that the US Federal Reserve has unduly controlled inflation for too long, threatening its labour market. Fed officials have previously said that a sharper deterioration in the labor market could prompt the central bank to cut rates more aggressively.
As evidence mounts that inflation is now back to 2.5 percent, critics say Fed policymakers should immediately turn their attention from taming price pressures to supporting the labor market and the economy.
However, the US economic survey system produces too much conflicting data. The so-called core CPI, which leaves out volatile energy and food prices, was higher than the market expected, rising 0.3 per cent in August. The increase was mainly due to a 0.5 percent rise in the housing index, which tracks spending by the U.S. real estate sector.
And this "core" CPI has attracted the attention of investors, which is also closely watched by Fed policymakers. After the announcement of the "core" CPI, investors raised their bets on a quarter-percentage point cut in interest rates and lowered their bets on a half-percentage point cut.
It is clear that Fed policymakers do not want to cut too quickly, probably because they fear that this could heat up the economy again and turn inflation into a permanent problem. The uncertainty of US monetary policy will naturally continue to lead to volatility in global markets in the months ahead.
Wen Sheng Global Times / Tian Yi, Liang Jun / gnews.cz-roz_07
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