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Wednesday’s CPI report could mark a change in thinking for the Fed

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Product prices as seen at Walmart. 

Courtesy: Walmart

The news Tuesday was good for inflation, and investors hope it will get even better Wednesday when the Labor Department releases the July consumer price index report.

With the score being one down, one to go on confirming that the early-year jump in prices either was a fluke or the last gasp of inflation, a positive CPI reading could mean the Federal Reserve is able to turn its gaze to other economic challenges, such as the slowing labor market.

“At this point, the inflationary pressure that we saw build has really been dissipated significantly,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “Inflation is almost a nonissue at this point. There’s this broad expectation that the worst is easily behind us.”

Like others on Wall Street, Baird expects the Fed in September to shift its focus from tight policy to tackle inflation to a somewhat easier stance to head off a potential weakening in the jobs picture.

While consumers and business owners continue to express concern over high prices, the trend indeed has shifted. Tuesday’s producer price index (PPI) report for July helped confirm optimism that the elevated inflation numbers that began in 2021 and spiked again in early 2024 are in the rearview mirror.

‘Absolutely no need’ for the Fed to cut by 50 basis points in September, economist says

The PPI report, seen as a gauge of wholesale inflation, showed prices up just 0.2% in July and about 2.2% from a year ago. That number is now very close to the Fed’s 2% goal and indicative that the market’s impulse for the central bank to start cutting rates is about on target.

Economists surveyed by Dow Jones expect the CPI similarly to show 0.2% increases on both the all-items reading and the core measurement that excludes food and energy. However, that is projected to show respective 12-month rates of 3% and 3.2% — well below their mid-2022 highs but still a good distance from the Fed’s 2% target.

Still, investors are looking for the Fed at its September meeting to start cutting interest rates, considering that inflation is weakening and so is the labor market. The unemployment rate has now risen to 4.3%, a 0.8 percentage point increase over the past year that has triggered a time-tested recession flag known as the Sahm Rule.

“Given the focus on the relative weakening in the labor market, given the fact inflation is coming down pretty rapidly, and I expect it will continue over the next few months, it would be a surprise if the Fed didn’t start moving towards easing very quickly, presumably at the September meeting,” Baird said. “If they don’t at the September meeting, the market is not going to take kindly to that.”

Worries over slow Fed response

A brief pickup in weekly initial unemployment claims, combined with other weakening economic metrics, briefly had some in the market looking for an emergency rate cut.

While that sentiment has dissipated, there’s still worry about the Fed being slow to ease, just as it was slow to tighten when inflation began to escalate.

Another benign inflation report “makes the Fed completely comfortable that they can shift their focus away from inflation and toward labor,” said Tom Porcelli, chief U.S. economist at PGIM Fixed Income. “They could have shifted their attention from inflation to labor … months ago. There are cracks forming in the labor market backdrop.”

Amid the twin realities of declining inflation and rising unemployment, markets are pricing in the absolutely certainty of a rate cut at the Sept. 17-18 Fed meeting, with the only question left being how much. Futures pricing is roughly split between a quarter- or half-point reduction, and leaning heavily to the likelihood of a full percentage point reduction by the end of the year, according to CME Group calculations.

However, futures pricing has been well off the mark for most of the year. Traders started the year anticipating a rapid pace of cuts, then pulled back into expecting only one or two before the latest swing in the other direction.

“I’m as curious about [Wednesday’s] inflation report as anyone else, but I think it would take a real outlier to change the Fed’s tune from 1) shifting to labor as its focus, and 2) seriously thinking about cutting in September,” Porcelli said. “They should start off aggressively. I can easily make the argument for the Fed to cut 50 basis points just to kick things off because I think they should have been cutting already. I don’t think that’s what they will do. They’ll start it off modestly.”

We forecast a recession which will slow inflaiton: Piper Sandler's Nancy Lazar

Economics

Andrew Bailey on why UK-U.S. trade deal won’t end uncertainty

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Bank of England Governor Andrew Bailey attends the central bank’s Monetary Policy Report press conference at the Bank of England, in the City of London, on May 8, 2025.

Carlos Jasso | Afp | Getty Images

Bank of England Governor Andrew Bailey told CNBC on Thursday that the U.K. was heading for more economic uncertainty, despite the country being the first to strike a trade agreement with the U.S. under President Donald Trump’s controversial tariff regime.

“The tariff and trade situation has injected more uncertainty into the situation… There’s more uncertainty now than there was in the past,” Bailey told CNBC in an interview.

“A U.K.-U.S. trade agreement is very welcome in that sense, very welcome. But the U.K. is a very open economy,” he continued.

That means that the impact from tariffs on the U.K. economy comes not just from its own trade relationship with Washington, but also from those of the U.S. and the rest of the world, he said.

“I hope that what we’re seeing on the U.K.-U.S. trade side will be the first of many, and it will be repeated by a whole series of trade agreements, but we have to see that happen of course, and where it actually ends up.”

“Because, of course, we are looking at tariff levels that are probably higher than they were beforehand.”

Trump unveils United Kingdom trade deal, first since ‘reciprocal’ tariff pause

In Bank of England’s Monetary Policy Report released Thursday, the word “uncertainty” was used 41 times across its 97 pages, up from 36 times in February, according to a CNBC tally.

The U.K. central bank cut interest rates by a quarter percentage point on Thursday, taking its key rate to 4.25%. The decision was highly divided among the seven members of its Monetary Policy Committee, with five voting for the 25 basis point cut, two voting to hold rates and two voting to reduce by a larger 50 basis points.

Bailey said that while some analysts had perceived the rate decision as more hawkish than expected — in other words, leaning toward holding rates elevated than slashing them rapidly — he was not surprised by the close vote.

“What it reflects is that there are two sides, there are risks on both sides here,” he told CNBC.

“We could get a much more severe weakness of demand than we were expecting, that could then pass through to a weaker outlook for inflation than we were expecting.”

“There’s a risk on the other side that we could get some combination of more persistence in the inflation effects that are gradually working their way through the system,” such as in wages and energy, while “supply capacity in the economy is weaker,” he said.

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Economics

Trump knocks down a controversial pillar of civil-rights law

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IN THE DELUGE of 145 executive orders issued by President Donald Trump (on subjects as disparate as “Restoring American Seafood Competitiveness” and “Maintaining Acceptable Water Pressure in Showerheads”) it can be difficult to discern which are truly consequential. But one of them, signed on April 23rd under the bland headline “Restoring Equality of Opportunity and Meritocracy”, aims to remake civil-rights law. Those primed to distrust Mr Trump on such matters may be surprised to learn that the president’s target is not just important but also well-chosen.

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Economics

Harvard has more problems than Donald Trump

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A Programme at Harvard Divinity School aspired to “deZionize Jewish consciousness”. During “privilege trainings”, working-class Harvard students were instructed that, by being Jewish, they were oppressing wealthier, better prepared classmates. A course in Harvard’s graduate school of public health, “The Settler Colonial Determinants of Health”, sought to “interrogate the relationships between settler colonialism, Zionism, antisemitism, and other forms of racism”: Will these findings by Harvard’s task-force on antisemitism and anti-Israel bias, released on April 29th, shock anyone? Maybe not. Americans may be numb by now to bulletins about the excesses, not to say inanities, of some leftist academics.

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