July CPI Expected to Rise 2.8% Year-over-Year, Influencing Fed Rate Cut Speculation

The U.S. July Consumer Price Index (CPI) is set to be released on Tuesday at 20:30 Beijing time, providing crucial insights into inflation trends and influencing market sentiment and the Federal Reserve's monetary policy decisions. Market participants anticipate that the July CPI will rise by 2.8% year-over-year, surpassing the 2.7% increase seen in June. This projection is driven by factors such as the decline in gasoline prices and a slight easing in food inflation expectations.

With signs of weakness in the U.S. employment market, expectations for a Federal Reserve rate cut in September have intensified. Derivatives trading indicates that investors are betting on two 25 basis point rate cuts by the Federal Reserve before the end of the year. Some investors are even speculating on the possibility of more aggressive easing measures, with a 50 basis point cut in September being discussed.

However, market participants hoping for a September rate cut may face a significant hurdle in the form of inflation. Recent reports from major financial institutions, including American banks, have highlighted concerns over persistent inflation. Analysts suggest that if inflation continues to rise, it could complicate the Federal Reserve's dual mandate of stabilizing employment and inflation, potentially delaying rate cuts.

The upcoming CPI data release is expected to provide a clearer picture of the economic landscape and the Federal Reserve's potential actions. The market is currently pricing in a near 90% probability of a rate cut in September, with expectations for at least two rate cuts by the end of the year. This anticipation reflects growing concerns over economic weakness and the need for monetary policy support.

Despite the anticipation of a rate cut, the Federal Reserve's ability to lower rates in the future may be constrained by persistent inflation. High inflation could lead to an increase in U.S. Treasury yields, making it more challenging for the Federal Reserve to implement further rate cuts. Additionally, the recent appointment of Stephen Moore to the Federal Reserve Board, a nominee of President Trump, could potentially add another dovish voice to the committee, influencing future policy decisions.

Analysts suggest that the Federal Reserve may prioritize addressing labor market weakness over inflation concerns, especially if the upcoming CPI data does not show a significant increase. However, if inflation continues to rise, the Federal Reserve may need to reassess its policy stance, potentially delaying rate cuts and focusing on managing inflation expectations.