Did the CPI Numbers Just Guarantee a September Rate Cut?

The latest CPI (consumer price inflation) numbers are in and will likely help the Fed justify a September rate cut.

Image: US annual inflation (source: TradingEconomics)

According to the release, annual inflation in the US slowed to 2.5% in August. This represents the fifth consecutive month of softening inflation. It’s also slightly lower than the forecasted inflation of 2.6%. This is significant since the Fed has been battling inflation for the past few years through one main lever: interest rates. 

Higher rates mean borrowing is more expensive. When borrowing is costly, people tend to borrow less. When they borrow less, they have fewer dollars to drop into the economy, helping slow inflation. 

Probability of a September rate cut implied by 30-Day Fed Funds futures (source: CME Group)

According to the CME FedWatch, 83% of interest rate traders anticipate a 25 bps this month. The remaining 17% are pricing in an even larger, 50 bps cut. Notably, more than nine out 10 economists recently surveyed by Reuters believe the Fed will cut rates three times before the year is out. 

Who Benefits?

Some sectors love interest rate cuts, and with the market increasingly forecasting a multi-stage unwinding, it could be an opportune time to increase exposure. Here are two sectors that could benefit from rate cuts.

Consumer Discretionary

Big ticket items, like cars and appliances, are often purchased on credit. As the Fed lowers rates, this sector could see a boost from consumers who are more willing to finance large purchases. This could potentially boost the bottom line for companies like Visa (NYSE: V).When rates are lower, consumers also feel more financially secure and, therefore, more comfortable increasing discretionary spending. 

• Not sure which names to consider? Check out our list of the Best Consumer Cyclical Stocks to Buy Now.

Real Estate

For most people, their home is the biggest item they will ever finance. As a result, even small changes in interest rates can substantially impact monthly payments. As rates fall, it becomes increasingly attractive for people to purchase a home. If the Fed cuts and keeps cutting, this sector could be in for a boost. This, in turn, can boost stocks related to building and home improvement — stocks to watch might include Builders Firstsource (NYSE: BLDR) or Home Depot (NYSE: HD). 

• Unsure how to invest in real estate? Visit our list of the Best Real Estate Stocks to Buy Now.

The Bottom Line

The latest CPI numbers showing a continued slowdown in inflation will further help the Fed justify a September rate cut, which the market already overwhelmingly expects.

With 83% of traders expecting a 25 basis point cut and economists anticipating more throughout the year, consumer discretionary and real estate sectors could benefit from lower borrowing costs. In turn, stocks in these sectors could experience some strong tailwinds in the coming months.

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