July US inflation likely steady as Fed struggles to justify higher rates: RBC By Investing.com

Investing.com — U.S. inflation data due later this week likely show inflation “held steady” in July, RBC estimates, supported by a narrowing source of price pressures, while the Reserve The Fed faces an “increasingly difficult” task to justify longer interest rates.

“We expect further signs of easing inflation in July,” RBC said, forecasting core price growth to hold at 3% on a year-on-year basis, but with a second straight monthly rise of 0.1% in core prices (excluding food and energy).

“That should reassure the Fed that those annual rates will continue to decline,” he added, as factors putting upward pressure on inflation have eased.

The Labor Department is scheduled to release for July at 8:30 a.m. EDT on Wednesday.

House rents, which account for a “disproportionate share of the remaining annual price growth”, adds RBC, are slowing as the impact of “the earlier reduction in market rent increases finally passes through to leases”.

Economically, there is nothing to suggest that the Fed should hit the panic button following the growth scare driven by rental jobs, but the higher US central bank rate for the longer rate regime it becomes difficult to justify.

“Evidence is accumulating that broader economic conditions have already normalized and that inflation is more likely to decline,” RBC said. Making the case for the Fed to justify keeping rates more than 200 basis points above its own long-term “neutral” rate estimate is becoming “increasingly difficult.”

The Fed sees the current neutral rate, one that neither stimulates nor hinders economic growth, at 2.5%, which is nearly 300 basis points below the current rate of 5.25% to 5.5% or 5.375% in the middle.

While a cut of 25 basis points is set for September, RBC believes that “risks of a larger cut are conditional on further slowdown in economic growth or inflation surprises”.