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The United States will release the July Consumer Price Index (CPI) on the 14th local time.

As the U.S. economy and labor market show signs of fatigue, the latest price report will attract close attention from the market as it may affect the timing of the eventual policy shift.The Fed reiterated in its July resolution statement that it would consider taking action only when it is more confident that inflation is moving sustainably toward its 2% target. Therefore, the data may add more weight to the potential September window and will also become a trigger for market volatility.

Inflation growth rate picks up

Since March this year, prices in the United States have returned to a downward trend. The June CPI report is one of the most encouraging reports the Federal Reserve has received since the start of this round of interest rate hikes. The CPI fell 0.1% month-on-month, the first decline since May 2020, due to lower gasoline costs and slower rents, which put inflation firmly back on track. Excluding food and energy, the core CPI rose slightly by 0.1% in June, the smallest increase since the beginning of 2021. Among them, core service prices rose by 0.1%, a significant improvement compared with the previous average monthly increase of 0.4%.

First Financial Daily reporters found that institutions previously predicted that July data might show a divergent trend. The overall CPI rebounded 0.2% in July, which would stabilize the 12-month change at 3.0%, a more than three-year low. Although gasoline prices rose 1% this month, grocery store prices may have barely changed amid more stable input prices and increased promotional activities.

The agency predicts that the core CPI will increase moderately by 0.2% in July, mainly due to the rebound of some volatile "super core" components, and the core inflation rate will drop slightly to 3.2% year-on-year.

Looking at the sub-indicators, as the core commodity inflation rate is already lower than the pre-epidemic level, more substantial cooling of the service industry is needed to continue to push down the core inflation rate.

Housing costs (including rent) rose modestly by 0.2% after increasing by 0.4% in May, but the sustainability of this increase remains to be seen.Wells FargoIn a report sent to the First Financial reporter, it was stated that after the sharp decline in the unstable tourism service category in June and the below-trend growth of medical services, the monthly growth in July will be driven by the "super core". However, the monthly rate estimate of core inflation of 0.2% will still be significantly lower than the average increase of 0.40% in the first six months of this year.

Looking ahead, inflation is expected to continue to dissipate in line with trend over the next few quarters, but remain above the Fed's target. With unit labor costs below 2%, labor market conditions no longer pose a threat to the Fed's inflation target. Although services inflation has been cooling at a slower pace than goods inflation, it should benefit from slower growth in physical input costs.

Beware of new volatility risks

Federal Reserve Chairman Powell said in testimony before the U.S. Congress that price pressures have improved, but he is not ready to declare that inflation has been defeated, and "more good data" will strengthen the case for a rate cut.

But there are growing signs that the labor market is losing momentum and economic activity is cooling as the Federal Reserve raises interest rates aggressively in 2022 and 2023. The unemployment rate rose to 4.3% in July from 4.0% in May. Since June, the number of people applying for unemployment benefits this year has hovered at a high level for the year.

The New York Fed’s second-quarter household debt and credit report, updated last week, showed that even as credit continues to increase, the pace of debt growth has slowed in recent quarters, suggesting that consumers may be feeling the pinch of rising interest rates.

Bank of MontrealIn an interview with China Business News, senior economist Sal Guatieri said that as commodity prices continue to face demand-side pressure, the outlook for core service prices has eased for the rest of the year, and the Federal Open Market Committee's dual task is to better balance inflation and labor risks.

Federal funds rate futures show that the probability of a 50 basis point rate cut in September has dropped from a high of nearly 80% to around 50%.Guatieri believes that although there is no sign that the Fed needs to cut interest rates in a hurry, the basis for a rate cut in September is slowly forming because the Fed's policy focus is gradually shifting from prices to the economy. He told China Business News that an unexpected rise in the unemployment rate could trigger the "Sam Rule" and raise concerns about a recession, giving the impression that the Fed is lagging behind the yield curve, but there are no obvious danger signs in the job market as a whole, and one should not overreact to a single report.

ING Group predicted last week that the Fed's first rate cut could be 50 basis points. Carsten Brzeski, the agency's global macro director, expects the fund rate to fall to around 3.5% by next summer. "We see the Fed acquiescing to some market concerns and could take a 25 basis point or 50 basis point rate cut right away, allowing them to quickly shift policy to a more neutral stance. With weak business surveys, a rapid cooling in hiring, inflation approaching 2%, and unemployment exceeding expectations, the Fed could argue that it should act sooner than previously expected."

It is worth mentioning that after the global capital market was panicked by the July non-farm report, investors are paying more attention to the performance of the next US economic data. Last week's favorable initial jobless claims report once stimulated the S&P 500 index to record the largest single-day increase in nearly two years. If the July CPI is significantly higher or lower than expected, it may trigger another round of market chaos. Citi warned that the volatility of US stocks will reach 1.2% by then, with Powell's speech at Jackson Hole, as well asNvidiaThe volatility is consistent when earnings are released.