Exactly what will June’s cooling inflation mean for US interest rates? There’s no denying that at 3% June’s CPI number is the smallest year-on-year increase since March 2021 and that all important core figure also fell back significantly.
But despite the cautious optimism evident from market reaction it seems unlikely the Fed will be swayed enough to change course just yet.
“Anyone who has ever tried to lose weight for a big event will tell you that the last inch is usually the hardest to shift and although core inflation has dropped to 4.8% it is still too hot. On top of this the US labour market is still proving remarkably resilient in the face of the Fed’s rate hike programme, which may suggest central bankers are likely to err on the side of caution.
“They’ve made it abundantly clear they don’t think the job is done, so to backtrack now might do more harm than good.
What is far more likely, and clearly reflected in the trajectory of the dollar today, is that rates are finally nearing their zenith – at least for this hiking cycle. Investors can now ponder what’s next and with markets always future-facing the tempo change will create buying opportunities and renewed excitement in some sectors that had been feeling a little unloved.
For those of us watching from across the pond the tantalising prospect of getting within a mere percentage point of the target seems like a very long way off.
It will be cold comfort to the millions of homeowners facing increasing mortgage payments that the UK banking sector has proved itself robust enough to weather the coming storm. Lenders will come under increasing pressure to use their improved net margins to reward savers and provide a safety net for those struggling with their new reality.
There is a silver lining to be found in those US numbers. The pound has once again surged against the dollar and that improved purchasing power will bring down the price of imported goods, which should in turn act as a cooling balm on our own overheated prices.
Danni Hewson is head of financial analysis at AJ Bell
