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 possibility of a 50 basis point rate cut in September is low. Federal Reserve officials and economists like to observe further to better understand the inflation trend.

Employment data has become more crucial.

As the economy slowly switches to a slowing gear, inflation overall still shows a downward trend. Coupled with a softening job market, it is generally expected that the Federal Reserve will cut interest rates next month, and the size of the cut may depend on more data to be released soon.

LPL Financial Chief Economist Jeffrey Roach said,"Both investors and policymakers will find that this report is basically beneficial to the market and the economy, and" "as inflation slows down, the Federal Reserve can reasonably cut interest rates while maintaining restrictive policies overall."

Before the September meeting, officials will obtain more inflation data and another employment report-the employment report will be scrutinized after disappointing data in July triggered a global market sell-off and recession concerns.

Federal Reserve Chairman Powell and his colleagues 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 to be held in Jackson Hole, Wyoming next week.

Brandywine Global Investment Manager Jack Mcintyre said:"US CPI data is important, but in terms of its impact on the market, it may rank third in the hierarchy of economic data-employment, retail sales, and inflation-so it is not so important." "Financial assets have performed well recently, we have PPI data, the market has reacted well to it, so the threshold will be higher, but I doubt that nothing will change when the dust settles."

Mcintyre said,"This obviously gives the Federal Reserve room to cut interest rates, so it tells you that inflation is developing in the right direction, and the longer the Federal Reserve does nothing, the more restrictive monetary policy will be." "We don’t know whether the Federal Reserve will cut 25 or 50 basis points, but I think inflation won’t decide this. What will determine the size of the rate cut will be growth-oriented economic statistics, especially labor statistics and employment."

Housing costs.

Last month, clothing, new and used cars, and airfare prices all fell. The drop in hospital services was the biggest in history. At the same time, subscription services for electronic games experienced the largest increase ever, after experiencing a sharp decline in May.

The largest category in the service industry, housing prices rose 0.4%, compared to 0.2% in June, the lowest level since 2021. Owner-equivalent rent (also the largest personal component in CPI) also rose 0.4%. Main residential rents rose 0.5%, the largest increase since February, which may raise doubts after economists and policymakers generally expect rents to slow down.

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

Gennadiy Goldberg, director of US rate strategy at TD Securities, said the only surprising thing about the CPI report was that rents were accelerating, which I think is why the market is somewhat disappointed. Although the data is actually weaker than market expectations, the market is reassessing the possibility of a 50 basis point rate cut in September. This pricing seems to have fallen from about 39 basis points before the data was released to the current 36 basis points. So the market believes that inflation is more difficult than the Federal Reserve expected.

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

This indicator, called the Personal Consumption Expenditure Price Index, has less impact on housing than CPI, which is also part of the reason why the Personal Consumption Expenditure Index tends to approach the Federal Reserve's 2% target.

The Personal Consumption Expenditures Price Index (PCE), which will be released later this month, is based on certain categories of the CPI and Producer Price Index (PPI). Data released by the government on Tuesday showed that the components of PPI in July were relatively mild and the overall data increase was lower than expected.

The reason for the decline in the PPI index is partly due to a decrease in profit margins for wholesalers and retailers, confirming companies' claims that they are losing pricing power, as well as recent discounts and promotions such as Amazon's Prime Day. Businesses across a range of industries from restaurants to airlines are realizing that consumers are becoming increasingly picky when it comes to spending, particularly in discretionary purchases.

For much of the past year, the sustained drop in commodity prices has brought consumers some relief. Core commodity prices, which exclude food and energy commodities, saw their largest decline since the beginning of the year. On an annual basis, this was the largest drop since 2004.

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

Editor/ping