TSX runs higher on rate cut expectations
Investing.com - U.S. consumer prices grew at a slightly faster-than-anticipated annualized pace in June, but remained broadly tame enough to bolster bets for a September Federal Reserve interest rate cut, according to data that comes as economists are attempting to assess the impact of aggressive U.S. tariffs on inflation.
The Labor Department’s headline consumer price index came in at 2.7% in the twelve months to June, compared with expectations of 2.6% and May’s reading of 2.4%.
Month-on-month, the figure was 0.3%, up from 0.1% in May and in line with projections.
Excluding more volatile items like food and fuel, so-called "core" CPI also accelerated slightly to 2.9% year-on-year and 0.2% on a monthly basis. Yet both readings were below estimates of 3.0% and 0.3%, respectively.
Price gains in items like household furnishings, medical care, recreation, apparel and personal care were mitigated by decreases in new vehicle costs and airline fares.
While the numbers are not the Federal Reserve’s preferred gauge of inflation, the trajectory of CPI could still factor into how the central bank approaches future interest rate decisions.
Fed Chair Jerome Powell has cited uncertainty around price growth as a reason why officials have yet to slash borrowing costs -- an argument that has drawn the ire of U.S. President Donald Trump. The president has demanded that the Fed cut rates quickly and has reportedly begun to explore possible replacements for Powell who will do so.
According to CME Group’s (NASDAQ:CME) FedWatch Tool, markets are betting the Fed could reduce rates twice this year. In the wake of Tuesday’s CPI release, the probability of a 25-basis point reduction from the current target band of 4.25% to 4.5% as soon as September climbed.
Economists have suggested that Trump’s punishing "reciprocal" tariffs, which he recently threatened to impose on a range of trading partners from August 1, could drive up inflationary pressures and weigh on growth.
But in a note, analysts at CIBC Economics argued that the costs of tariffs transferring from businesses to customers continue to be "modest" partly because many companies have been stocking up their inventories in preparation for the tariffs to kick in.
"However, those inventories are becoming thinner and we expect to see tariff passthrough ahead, which will keep the Fed on the sidelines for now," the CIBC (TSX:CM) analysts said.