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CPI Preview: Can July's Data Further Boost Rate Cut Expectations?
AInvestWednesday, Aug 14, 2024 5:04 am ET
3min read
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After the CPI recorded its first monthly decline in four years in June, there is speculation whether the July price index will continue to build on its success and further solidify market expectations for an interest rate cut.

Today at 8:30 AM, the U.S. Bureau of Labor Statistics will release the Consumer Price Index (CPI) report for July. The market expects that, excluding the volatile prices of food and energy, the core CPI for last month will increase by 0.2% from June, but the year-over-year (YoY) increase will be 3.2%, lower than June's 3.3%. Overall, the total CPI reading for July is expected to rise by 0.2% month-over-month, an improvement from the slight decrease of -0.1% in June, but the year-over-year increase of 2.9% will also be lower than June's 3%.

Airfare Could Be the Biggest X Factor

In terms of specific items, housing costs, including rent, are expected to continue the downward trend from June—economists point out that they expect housing-related costs to rise by 0.3% month-over-month in July and to maintain a growth rate of 0.25% to 0.30% per month through the end of the year. Although this growth rate is slightly higher than the 0.2% increase in June, it is generally conducive to controlling the CPI growth rate and is in line with the Federal Reserve's established inflation target of 2%.

 In terms of energy, as a major force in price suppression recently, energy prices are believed to continue to stabilize in July. In June, due to a significant 3.8% drop in gasoline prices, the energy index fell by 2% and made a key contribution to the overall price index decline in June. However, some analysts argue that considering the complex situation in the Middle East, any instability could disrupt energy supplies and push prices higher, reversing some of the recent gains in inflation control.

In addition, within the commodity components of the index, analysts are also particularly concerned about the price changes related to used cars and travel, as if these items decline in July, given their weight in the index, it could help the core CPI show a broader and more sustained downward trend.

Used car auction prices have now fallen 26% from their peak versus 18% for CPI used car prices, suggesting that there is room for the CPI measure to fall further, said Ronnie Walker and Jessica Rindels, economists at Goldman Sachs, in their previous forecasts.

However, for travel-related items, including airfare, economists believe that the price index may rebound in July. Previously, airfare was an important factor in the unexpected decline of the core CPI index in June, as its 5% drop in the month set a record for the past year. But whether this trend can continue in July is not certain.

We were surprised by the weakness in airfares last year, which fell even below pre-pandemic levels on a seasonally adjusted basis., said Veronica Clark and Andrew Hollenhorst, economists at Citi. We had been expecting some pickup in airfares this year as the sample of flights priced in CPI last summer possibly reflected flights with low summer demand, but as travel demand broadly could be softening more than last year, airfares could remain weak.

A 50 Bp Cut Also Seems Possible?

The July CPI report is particularly important for shaping market expectations for an interest rate cut, as Federal Reserve Chairman Jerome Powell has previously emphasized that favorable inflation data will play a key role in the pace of the Fed's interest rate cuts. According to Sevens Research, a good CPI report - core CPI year-over-year growth controlled below 3.4%, and the overall CPI at 3.1% or lower - could almost guarantee a rate cut in September and drive another rise in the asset market, including the stock market.

It is worth noting that with last night's better-than-expected PPI data in the United States, the market has already begun to voice the possibility of the Fed cutting rates by 50 basis points in September. Even on the FedWatch, the probability of the Fed cutting rates by 50 basis points next month has exceeded 50%.

Given the focus on the relative weakening in the labor market, given the fact inflation is coming down pretty rapidly, and I expect it will continue over the next few months, it would be a surprise if the Fed didn't start moving towards easing very quickly, presumably at the September meeting, said Jim Baird, Chief Investment Officer at Plante Moran Financial Advisors.

Currently, investors are preparing for the July CPI report: many are turning to more defensive assets such as bonds, cash, and healthcare stocks, while reducing their exposure to stocks, especially in sectors like technology and European markets. In the bond market, based on current market pricing, the Fed is considered to cut rates by 75 basis points before the end of this year and further cut rates next year. These actions and outlooks reflect a growing belief that the U.S. economy may enter a mild recession in the coming year, which will bring a more accommodative monetary policy.

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