The US Bureau of Labor Statistics released data on Thursday showing that the core Consumer Price Index (CPI) for July, which excludes food and energy costs, rose 3.2% year-on-year, but it is still the slowest growth since the beginning of 2021. The index rose 0.1% month-on-month, a slight increase from June.

The CPI rose 0.2% month-on-month and 2.9% year-on-year. The Bureau of Labor Statistics indicated that nearly 90% of the monthly inflation rate increase came from housing, where housing prices have risen since June. Economists believe that core CPI is a better reflection of potential inflation compared to overall CPI.

Single stock futures rose slightly, and US Treasury yields rose.

Traders believe that the likelihood of a 50 basis point rate cut in September is low. Federal Reserve officials and economists prefer to observe further to better understand the inflation trajectory.

Employment data has become more critical.

As the economy slowly transitions to a deceleration phase, overall inflation remains on a downward trend. Combined with a weak job market, the market generally expects that the Federal Reserve will begin to lower interest rates next month, and the degree of interest rate cuts may depend on more data that is about to be released.

LPL Financial's chief economist, Jeffrey Roach, said, "Both investors and policymakers will find that this report is basically beneficial to the market and the economy. As inflation slows down, the Federal Reserve can lower interest rates reasonably while maintaining an overall restrictive policy."

Before the September meeting, officials will receive more inflation data and one more employment report. After the disappointing July data triggered a global market sell-off and recession concerns, the employment report will be scrutinized.

Federal Reserve Chairman Powell and his colleagues have recently stated that they will pay more attention to labor issues in the Federal Reserve’s dual mandate, and they may emphasize this at the annual symposium in Jackson Hole, Wyoming next week.

Brandywine Global Investment Manager Jack Mcintyre said, "US CPI data is important, but for market impact, it may rank third in economic data—that is employment, retail sales, and inflation—so it’s not that important. Financial assets have performed well recently. We have PPI data, and the market has responded well to it, so the threshold will be higher, but I doubt that everything will change when the dust settles."

Mcintyre said, "This obviously gave the Federal Reserve room to cut interest rates, so it tells you that inflation is developing in the right direction. The longer the Federal Reserve is inactive, the more restrictive monetary policy will be. We don’t know if the Federal Reserve will cut interest rates by 25 or 50 basis points, but I think inflation will not determine this. Growth-oriented economic statistical data, especially employment statistics and employment figures, will determine the magnitude of interest rate cuts."

Housing costs.

Last month, clothing, new and used cars, and airfare prices all fell. The decline in hospital service fees was historically the most significant. Meanwhile, after a sharp decline in May, electronic game subscription services recorded the largest increase ever.

Housing, the largest category in the service sector, rose by 0.4%, compared to 0.2% in June, the lowest level since 2021. The owners' equivalent rent (also the largest personal composition part of the CPI) also rose by 0.4%. The primary residential rent rose by 0.5%, the largest increase since February, and this may cause doubts after economists and policymakers generally expected rents to slow down.

Excluding housing and energy, service prices rose by 0.2%. This is the first increase in three months, but it is still a moderate pace. Although Federal Reserve officials emphasized the importance of considering this indicator when evaluating the national inflation trajectory, they calculate inflation based on a separate index.

Gennadiy Goldberg, Director of US Interest Rate Strategy at Evercore ISI, said that the only surprise in the CPI report is the acceleration of rent increases. I think this is why the market reacted somewhat disappointedly, although the data is actually weaker than the market's general expectations. The market is reevaluating the likelihood of a 50 basis point rate cut in September. This pricing seems to have dropped from about 39 basis points before the data was released to 36 basis points now. So the market believes that inflation is more tricky than the Federal Reserve expected.

In addition to this, Goldberg believes that this does meet the conditions for the Federal Reserve to raise interest rates in September. Of course, the biggest issue for the market will be whether to cut interest rates by 25 or 50 basis points, which will be determined in the next few weeks.

This indicator, known as the Personal Consumption Expenditures Price Index, has less impact on housing than the CPI, which is also why the Personal Consumption Expenditures Index tends to approach the Federal Reserve's 2% target.

The Personal Consumption Expenditures (PCE) index, which will be released later this month, is derived from certain categories in the CPI and the Producer Price Index (PPI). Data released by the government on Tuesday showed that these parts of the PPI were relatively moderate in July, and the overall data growth rate was lower than expected.

One reason for the decline in the PPI index is that the profit margins of wholesalers and retailers have declined, confirming companies' claims that they are losing pricing power, as well as recent discounts and promotions such as Amazon's Prime Day. From restaurants to airlines, companies realize that consumers are becoming increasingly picky in their consumption, especially in discretionary purchases.

For much of the past year, the sustained decline in commodity prices has brought some comfort to consumers. The so-called core commodity prices (excluding food and energy commodities) recorded their largest decline since the beginning of the year. On an annual basis, this is the largest decline since 2004.

Another report released on Wednesday that integrated inflation data and recent wage data showed that the actual income growth rate in July slowed compared to the same period last year.

Editor/ping