Global investment bank Morgan Stanley stated that disinflation, a slowdown in the rate of price increases, is now evident in the U.S. economy. This assessment comes after recent U.S. inflation reports, including the Consumer Price Index (CPI) and Producer Price Index (PPI), indicated a moderation in annual price pressures. For July, the headline U.S. CPI growth slowed to 3.4% from 3.5% in June, while core CPI, which excludes volatile food and energy prices, moderated to 2.5% from 2.6%.
According to Morgan Stanley analysts, led by Michael Gapen, this disinflationary trend is primarily driven by the easing impact of tariffs, relief in energy prices, and a moderation in shelter inflation. They also noted that cooling employment and wage growth are contributing factors, collectively suggesting that the Federal Reserve (Fed) has some room to keep interest rates on hold and await further data.
Morgan Stanley projects the Fed will maintain current interest rates through the end of the year, with rate cuts of 50 basis points (25 basis points each in March and June) expected in 2027. This forecast assumes core Personal Consumption Expenditures (PCE) inflation, the Fed’s preferred inflation gauge with a 2% target, will decline to 2.4% by the end of 2027. However, the bank highlighted significant upside risks to this outlook. These include the potential for new supply-side shocks, increased price pressures from artificial intelligence (AI)-related demand, or the possibility that inflation may not abate enough to justify rate cuts, potentially leading the Fed to maintain current rates or even reverse course with further hikes.
The emerging disinflationary environment and expectations of Fed patience could be favorable for risk assets such as stocks. Investors have already scaled back their bets on further rate hikes, with the probability of the Fed holding rates steady at its September meeting now standing at approximately 67%. However, the outlook remains fragile. Geopolitical events and renewed inflation dynamics could trigger market volatility. Should interest rates remain higher for longer or even rise unexpectedly, it could pressure sectors sensitive to financing costs, like technology stocks.
Mi-ran Jang
Economy Desk · Economy
