Hot inflation data pushes market’s rate cut expectations to September

Inflation has been higher than expected for three consecutive months, dashing hopes that it would soon decline to the Federal Reserve’s target of 2%.

The latest Consumer Price Index (CPI) report revealed an increase of 3.5% in consumer prices over the past year, exceeding projections.

This has fueled concerns that inflation may be more persistent than previously anticipated.

Moreover, a measure called “supercore” services inflation, which excludes energy and housing costs, surged at an annualized rate of 7.2%.

This signifies that inflation is becoming more entrenched across various sectors.

Markets reacted negatively to this news, with the Dow Jones Industrial Average dropping by more than 1%.

Investors are now lowering their expectations for Federal Reserve rate cuts in 2023.

Previously, the market had anticipated as many as seven rate cuts, but this has been revised down to two or potentially zero.

While there are some indications that inflation may moderate in the future due to factors like increased productivity and slower money growth, economists still anticipate inflation remaining elevated.

This suggests that the Federal Reserve may not ease monetary policy as aggressively as previously expected.

The market’s overly optimistic expectations for rate cuts, which were inconsistent with the Fed’s signals, have contributed to the current disappointment.

However, analysts believe that if the economy maintains its strength, the negative market reaction may subside in the long run.