US Inflation Cools More Than Expected, Bolstering Rate-Cut Bets

The latest US consumer price index reading showed inflation cooling more than economists had forecast, offering fresh support to market expectations that the Federal Reserve could begin cutting rates before the end of the year.

Headline prices rose at a slower annual pace than in the prior month, with the deceleration driven by softer readings across shelter, used vehicles, and several categories of discretionary goods.

Core inflation, which strips out volatile food and energy components and is closely watched by policymakers, also came in below consensus, marking its softest monthly gain in over a year according to the desk's tracking.

Markets reprice the rate path

Interest-rate futures moved quickly to reflect the data, with the implied probability of a cut at the Fed's September meeting rising notably within minutes of the release. Treasury yields fell across the curve as traders adjusted their positioning.

Equity markets responded positively, with rate-sensitive sectors including real estate and small-cap stocks outperforming the broader index, reflecting their greater leverage to lower borrowing costs.

The dollar weakened modestly against a basket of major currencies following the report, extending a trend that has seen the currency give back some of its earlier-year gains as rate-cut expectations have firmed.

Economists on the desk noted that while one soft reading does not guarantee a sustained trend, the breadth of the deceleration across multiple categories offered more encouraging signals than in previous months, when declines were often concentrated in just one or two components.

Attention now turns to the upcoming producer price and employment reports, which analysts said will be critical in confirming whether the disinflationary trend has genuine staying power.