According to Evercore ISI analysts, the focus of the Fed has shifted from inflation data to labor data, fundamentally changing its monetary policy.

The investment firm said in a statement on Monday that the Fed will now prioritize labor market data, with the upcoming US Consumer Price Index (CPI) playing a secondary role in its decisions.

Evercore ISI explains that while the Fed is still concerned about inflation, particularly July's CPI, it has a "lower reliance on data points and more foresight."

Strategists emphasize that even if inflation is higher than expected, the Fed may still focus on preventing deterioration in the labor market. That is, there is a high probability of rate cuts in September.

"For the Fed and the market, employment data is now more important than inflation data." The statement said.

According to the firm, this shift reflects the Fed's broader strategy of mitigating downside risks to employment rather than overreacting to short-term inflation volatility.

Analysts point out that the Fed has adopted a "two-way risk management" approach, acknowledging progress in inflation and reducing the likelihood that labor markets will push up inflation.

The upcoming inflation data may affect the Fed's freedom of action, but Evercore ISI believes that "the soft data of core CPI, which increased by 0.2% month-on-month, will be a clear signal of risk preference," giving the Fed greater room to preemptively cut rates.

Although the 0.2% sequential growth rate has accelerated from June, core CPI is expected to continue to grow at its slowest pace since early 2021 on a year-on-year basis, falling from 3.3% in June to 3.2%. Meanwhile, overall CPI is expected to increase by 0.2% sequentially and 3% year-on-year.

If the CPI report meets expectations, this would suggest that inflation is still on a downward trend. Economists generally expect inflation to rebound slightly after the unexpected low data in June. They point out that this reversal is mainly due to the so-called super-core inflation, which excludes housing as a key category that policy makers are concerned about. Some forecasters also point out that rising transportation costs may pose upward risks to commodity prices.

However, the slowdown in housing costs that began in June is expected to continue. This category accounts for about one-third of the overall CPI and is an important determinant of broader inflation trends. The Producer Price Index (PPI), released the day before CPI, will also be closely watched as categories within it can affect the Fed's preferred inflation metric, the Personal Consumption Expenditures Price Index (PCE).

Editor/Emily