Inflation cooled in July, adding to the case for rate cuts at the next Fed meeting

• Inflation cooled in July based on the consumer price index.
• CPI rose 2.9% over the year in July, just below the forecast.

New data out Wednesday showed inflation cooled again in July.

The consumer price index increased 2.9% over the year ending in July, coming in cooler than the expected 3.0% increase and just lower than June's 3.0% read. It's the first time the inflation rate has been below 3% since March 2021, and it adds to the case that the Fed could cut rates at its next meeting.

Over the month, the consumer price index rose 0.2% in July. A small increase was expected after a decrease of 0.1% in June.

Core CPI, which excludes volatile food and energy prices, rose 3.2% for the 12 months ending July, following a 3.3% increase in June. A 3.2% increase was expected for July. This index rose 0.2% over the month from June to July, the same as the forecast of 0.2% and above the 0.1% increase in June.

Meanwhile, the Bureau of Labor Statistics said on Tuesday the producer price index for final demand rose 0.1% from June to July, just short of the 0.2% forecast and the previous month-over-month increase.

The next Federal Open Market Committee meeting is in September, and interest rate cuts are expected after the Fed has held interest rates steady for the last year, including the FOMC's most recent decision in July. CME FedWatch shows that markets predict the chances for a rate cut in September are pretty much 100%, but whether the Fed makes a standard-sized 25-basis-point cut or a larger 50-point cut is still up in the air.

The Fed is watching for inflation to cool before committing to rate cuts. Federal Reserve Chair Jerome Powell said on July 9 that the Fed needs "more good data so that we can be confident that what we're seeing is really" inflation heading back toward the central bank's 2% target.

Many economists think it's well past time for the Fed to cut interest rates and have expressed worries about the rapidly cooling labor market. Nick Bunker, the economic research director for North America at the Indeed Hiring Lab, told Business Insider after July's jobs report was released in early August by the Bureau of Labor Statistics that "the soft landing for the US labor market is in peril." The jobs report showed the unemployment rate stood at 4.3% in July, and the economy added 114,000 nonfarm payrolls. In July 2023, the unemployment rate was 3.5%, and the economy added 184,000 jobs.

The labor market is cooling off, and it might be harder to get a job than a few years ago. "We're really moving into a place where this is more weakness than we should be comfortable with," Claudia Sahm, the chief economist at New Century Advisors and former Federal Reserve economist, said.

"We know that reducing policy restraint too soon or too much could result in a reversal of the progress we have seen on inflation," Powell said at the end of July. "At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment."

This is a developing story. Please check back for updates.