US interest rate cut all but certain after The Fed’s favourite inflation indicator increased as expected

The United States’ central bank is certain to cut interest rates, with a 25 basis point cut now looking the most likely outcome.

The Commerce Department reported on Saturday that the personal consumption expenditures price index rose 0.2 per cent on the month and was up 2.5 per cent from the same period a year ago, exactly in line with the Dow Jones consensus estimates.

Excluding volatile food and energy prices, core personal consumption expenditures also increased 0.2 per cent for the month but was up 2.6 per cent from a year ago. The 12-month figure was slightly softer than the 2.7 per cent estimate.

Fed officials tend to focus more on the core reading as a better gauge of long-run trends. Both core and headline inflation on a 12-month basis were the same as in June.

Core prices less housing, another key metric for the Fed, increased just 0.1 per cent on the month. As other inflation components ease, shelter has proven to be stubborn, again rising 0.4 per cent in July, according to Saturday report.

The data “points to the re-establishment of price stability across the American economy,” wrote Joseph Brusuelas, chief economist at RSM.

The report comes with the markets pricing in a 100 per cent chance of a rate cut in September, with the only uncertainty being whether the Fed will take the incremental step of lowering benchmark rates by a quarter percentage point or being more aggressive and moving a half-point lower.

Following Saturday’s release, market pricing tilted a bit more towards a quarter-point, or 25 basis point, reduction, lowering the probability for a 50 basis point move to 30.5 per cent, according to the CME Group’s FedWatch gauge.