It is a very happy Friday for most ASX shares so far today. The S&P/ASX 200 Index (ASX: XJO) quickly clocked a series of new record highs in early trading today, and has continued to push higher into the afternoon.
At the time of writing, the ASX 200 is up a healthy 0.93% at just over 7,960 points after hitting a new record high of 7,969.1 points this morning.
But let's talk about some economic news out from the United States overnight that might have some consequences for ASX investors going forward.
The United States, like Australia, has been struggling with the economic impacts of inflation over the past few years. Like in Australia, the US has been steadily ratcheting up interest rates in an attempt to control inflation.
Last night, we got the latest news on how that struggle is going.
Image source: Getty Images
American CPI falls over June
According to reporting from CNBC, the American consumer price index (CPI) fell 0.1% between May and June. That drop puts the annual rate of inflation in the US economy at 3%, which is reportedly the lowest figure in more than three years. It's the first time since May 2020 that monthly CPI declined.
Core CPI, which excludes volatile items like petrol and food costs, increased 0.1% month-on-month though, putting its annual rate at a higher 3.3%. Even so, this rise was the smallest increase in core inflation since April 2021.
This inflation report was welcomed by economic commentators. Here's some of what Morgan Stanley's Chris Larkin told CNBC:
The June inflation report means the [US Federal Reserve] is one step closer to a September rate cut… A lot can happen between now and September 18, but unless most of the numbers pivot back into 'hot' territory, the Fed's reasoning for not cutting rates may no longer be justified.
As most ASX investors know, interest rates are usually raised to put downward pressure on inflation. Since inflation seems to be cooling in the States, the next interest rate move might be a cut, and perhaps sooner rather than later.
But what would this mean for ASX shares?
Well, this report is arguably great news for ASX investors as well. Interest rates may be different from country to country. But they are all interconnected too. It's no coincidence that the US has raised interest rates over the past few years almost in tandem with our own Reserve Bank of Australia (RBA).
If American inflation is cooling, it bodes well for Australian inflation as well. Taking inflationary heat out of the global economy is what the RBA would want to see from the United States. And it just got a big dose of that.
If rates do start dropping over in the US, it would probably mean that an interest rate cut in Australia is more likely. That's not a guarantee, of course. But this June inflation report out of the US is probably just what Michelle Bullock and the other bigwigs at the RBA were hoping to see.
Lower inflation will eventually lead to lower interest rates, both here and in the United States. And lower rates are great news for the share market. Remember, high interest rates tend to suck money out of ASX shares as investors flock to safer investments like cash and bonds. Lower rates would have the opposite effect.
As such, this inflation report is exciting for ASX investors, which might be at least partly why the Australian stock market is reaching new record highs today.
Let's see what the RBA's next move might be.
