US inflation easing: What does it mean for ASX shares?

If America cuts interest rates, will Australia be next?

| More on:
Woman with a coffee mug in one hand and a tablet in another along with pears on the table, symbolising inflation.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

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.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Economy

A happy shopper lifts her bags high, indicating a rising share price in ASX retail companies
Economy

The latest retail sales data is out: What did it reveal about the Australian economy?

Retail sales data is a closely watched metric by investors and economists.

Read more »

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer
Economy

1 month on from Trump's Liberation Day. What's the latest with Trump's tariffs?

A lot has changed in one month.

Read more »

Man putting a ballot into a voting box in Australia.
Economy

Federal Election Eve: How does Macquarie expect markets to respond to the result?

Will the market go on a tear like the recent US Presidential election?

Read more »

A worried woman looks at her phone and laptop, seeking ways to tighten her belt against inflation.
Economy

US economy reports negative GDP growth in Q1. What does this mean?

The US is now halfway to a recession.

Read more »

A young man goes over his finances and investment portfolio at home.
Economy

Is Australia's AAA credit rating at risk?

S&P Global Ratings issued a statement earlier this week.

Read more »

A man sits in deep thought with a pen held to his lips as he ponders his computer screen with a laptop open next to him on his desk in a home office environment.
Share Market News

What the latest inflation data means for ASX 200 investors and RBA interest rate cuts

Will ASX 200 investors enjoy a May RBA interest rate cut following the latest inflation print?

Read more »

Magnifying glass on a rising interest rate graph.
Economy

How likely is a 50 basis point interest rate cut next month?

What are experts tipping for next month's RBA meeting?

Read more »

Man smiling at a laptop because of a rising share price.
Share Market News

Why is the ASX 200 roaring higher today?

ASX 200 investors have good reason to celebrate today.

Read more »