Headline inflation has dropped to 2.5%, lower than the predicted 2.9%, marking the lowest level since 2021. This decline is driven by falling energy and food prices. However, for markets, the core Consumer Price Index (Core CPI), which excludes these volatile items, is the key indicator. With a cooling labour market and slowing wage growth, service prices are also easing. 

While the inflation announcement is still above the Federal Reserve’s 2% target, the drop is a welcome sign. Yet, this decrease could signal a weakening economy, similar to China, where deflation in producer prices is being observed. 

The Federal Reserve is expected to cut interest rates on September 18, according to statements by Fed Chair Jerome Powell. The main question is whether the cut will be the standard 25 basis points (bps) or a larger 50 bps, which is favoured by markets. 

With inflation coming in lower than expected, there’s a higher chance of a 50-bps rate cut, which may boost Gold and stocks, while putting pressure on the US Dollar. On the flip side, higher inflation may strengthen the Dollar but weigh down Gold and equities. 

Keep an eye out for next week’s Market Movers instalment to learn how these developments might affect your investments.