US July CPI Preview | The Cooling of the Job Market May Gradually Transmit to a Slowdown in Inflation

On August 14, the U.S. Bureau of Labor Statistics will release CPI data for July at 8:30 a.m. ET. The upcoming report may further prove that even if inflation has not yet fully fallen back to the Fed's target level, it will show further signs of slowing down.

Economists expect the overall CPI to rise by 0.2% in July, which will bring the annual rate to the lowest level in more than three years, 2.9%. The core CPI is also expected to increase by 0.2% in July. The slowdown in housing inflation in the first six months of this year may continue. If achieved, the 12-month change rate of the core CPI will drop to a new cycle low of 3.2%. The Cleveland Fed's model shows that the year-on-year CPI in August may even drop to 2.7%.

The average Crude Oil Spot Price is at a current level of $83.26, up from $81.20 last month and up from $78.98 one year ago. This is a change of 2.53% from last month and 5.41% from one year ago. Supply is very plentiful as weekly crude oil production in the United States increased to 13400 Thousand Barrels Per Day on August 2 from 13300 Thousand Barrels Per Day in the previous week, reaching an all-time high. For overall energy prices, the IMF’s monthly Fuel (Energy) Index also showed a similar stabilizing trend in July.

The FAO Food Price Index stood at 120.8 points in July 2024, marginally below its revised figure for June, as a decrease in the price index for cereals outweighed increases in the price indices for meat products, while the dairy index was almost unchanged. Overall, the FFPI remained 3.1 percent lower than its corresponding value one year ago and 24.7 percent below its peak of 160.3 points reached in March 2022.

Wholesale used-vehicle prices were higher in July compared to June. The Manheim Used Vehicle Value Index (MUVVI) rose to 201.6 in July, but still a decline of 4.8% from a year ago. The non-adjusted price in July increased by 0.6% compared to June.

"Wholesale prices experienced a slowdown in their decline at the end of June, and this pattern persisted into July, with an overall appreciation in value throughout the month," stated Jeremy Robb, Senior Director of Economic and Industry Insights at Cox Automotive. "Each week of July saw an increase in the sales conversion rate, which ultimately led to an uptick in wholesale prices for the entire month."

Apartment List's report shows that rent growth over the course of 2024 as a whole remains modest, signaling ongoing sluggishness in the market. Although rents continue to grow on a monthly basis, the pace is slowing down. In July, prices saw a mere 0.2% rise, bringing the national median rent to $1,414. On a year-over-year basis, national rent growth remains in negative territory at -0.8%.

The report noted there is a strong possibility that rent growth could stagnate or even decline in August and potentially maintain that flat or downward trend for the rest of the year.

While non-farm payrolls in July were significantly lower than expected, the wage growth rate announced during the same period dropped to 3.6%, the lowest level in many years. This is expected to alleviate the cost pressure on basic service industries since their expenditures are highly dependent on personnel employment. Therefore, labor wages may therefore no longer pose a meaningful threat to the Fed's 2% inflation target.

The recent profit margin level of McDonald's is lower than expected, and hotel groups such as Marriott and InterContinental have lowered their full-year guidance, which also confirms that the price trend in the service industry is difficult to maintain.

Since interest rate cuts have been fully priced this year, investors need appropriate CPI data showing that inflation is declining, but there are no signs of recession. It's still not clear how the market could react to the upcoming report, but if the CPI's downward trend slows again, it could put the Federal Reserve in a dilemma of whether to prioritize employment or to continue fighting inflation. On the other hand, if the CPI falls too rapidly, the Fed will face the difficult decision of whether an emergency rate cut is needed, with still about 36 days left until the next FOMC meeting.

Although most analysts expect a soft landing for the U.S. economy, industry consolidation and unexpected news of corporate bankruptcies and restructurings could happen in the early stages of the economy’s slowdown. Therefore, interest rate decisions will be more sensitive at this moment.

The CME FedWatch indicates that the probability of a direct 50 basis point rate cut in September has reached 50.5%. Before the September interest rate meeting, we will continue to see data releases such as the July PCE, August non-farm payrolls, and CPI. By then, the trajectory for rate cuts may become clearer.

Source: Apartment List, Cox Automotive, IMF