U.S. inflation has cooled for four consecutive months in July, with employment data becoming the final "roadblock" for the Fed's rate cut

According to the Zhitong Finance APP, US inflation continued to decline for the fourth consecutive month in July, making it possible for the Federal Reserve to lower interest rates next month. Data released by the US Bureau of Labor Statistics on Thursday showed that the core Consumer Price Index (CPI), which excludes food and energy costs, rose by 3.2% year-on-year in July, but it was still the slowest growth since the beginning of 2021. The index rose by 0.1% month-on-month, slightly up from June.

The CPI rose by 0.2% month-on-month and 2.9% year-on-year. The Bureau of Labor Statistics stated that nearly 90% of the monthly inflation rate increase came from housing, with housing prices rising since June. Economists believe that the core CPI can better reflect potential inflation compared to the overall CPI.

Stock futures edged up slightly, while US Treasury yields rose.

Traders believe that the likelihood of a 50 basis point rate cut in September is low. Federal Reserve officials and economists prefer to observe further to better understand the inflation trajectory.

Employment data becomes more critical

As the economy slowly transitions into a deceleration phase, inflation overall continues to decline. Coupled with a soft job market, it is widely expected that the Federal Reserve will begin cutting interest rates next month, with the extent of the rate cut possibly depending on more upcoming data.

Jeffrey Roach, Chief Economist at LPL Financial, stated, "Investors and policymakers will find this report generally favorable for the markets and the economy," "With inflation slowing down, the Fed can reasonably cut rates while maintaining an overall restrictive policy."

Ahead of the September meeting, officials will receive more inflation data and another employment report - following disappointing data in July that triggered a global market sell-off and recession concerns, the employment report will be closely scrutinized.

Federal Reserve Chairman Powell and his colleagues recently stated that they will pay more attention to labor issues in the Fed's dual mandate, which they may emphasize at the annual symposium in Jackson Hole, Wyoming next week.

Jack Mcintyre, Investment Manager at Brandywine Global, 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 - namely employment numbers, retail sales, and inflation, so it's not as important." "Financial assets have recently performed well, we have PPI data, and the market has reacted positively to it, so the threshold will be higher, but I doubt that everything will change once the dust settles."

Mcintyre added, "This clearly gives the Fed room to cut rates, so it tells you that inflation is moving in the right direction, the longer the Fed does nothing, the more restrictive monetary policy will become." "We don't know whether the Fed will cut rates by 25 or 50 basis points, but I don't think inflation will determine that." The decision on the magnitude of the interest rate cut will be driven by growth-oriented economic statistics, especially labor statistics and employment figures.

Housing Costs

Last month, prices of clothing, new cars, used cars, and air tickets all saw declines. The drop in hospital services prices hit a historical low. Meanwhile, after a sharp decline in May, subscription services for electronic games saw the largest increase ever.

The largest category in the service sector, housing prices, rose by 0.4%, down from 0.2% in June, marking the lowest level since 2021. Owner's equivalent rent (also the largest individual component in the CPI) also rose by 0.4%. Primary residence rents increased by 0.5%, the largest increase since February, which may raise questions as economists and policymakers widely expected rents to slow down.

Excluding housing and energy, service prices rose by 0.2%, the first increase in three months, but still at a moderate pace. Although central bank officials emphasize the importance of considering this indicator when assessing the national inflation trajectory, they calculate inflation based on a separate index.

Gennadiy Goldberg, the head of US rate strategy at TD Securities, said the only surprising aspect of the CPI report is the accelerated rise in rents, which I think is why the market is somewhat disappointed, even though the data is actually weaker than the market generally expected. The market is reassessing the possibility of a 50 basis point rate cut in September. This probability seems to have decreased from around 39 basis points before the data was released to the current 36 basis points. So the market believes that inflation is a bit trickier than what the Fed expected.

Furthermore, Goldberg believes that this does meet the conditions for a Fed rate hike in September. Of course, the biggest question for the market will be whether it will be a 25 or 50 basis point rate cut, which will be determined in the coming weeks.

The indicator known as the Personal Consumption Expenditures Price Index has less impact on housing than the CPI, which is partly why the Personal Consumption Expenditures Index tends to approach the Fed's 2% target.

The Personal Consumption Expenditures Index (PCE) to be released later this month is derived from certain categories in the CPI and the Producer Price Index (PPI). Data released by the government on Tuesday showed that these parts of the July PPI were quite moderate, with overall data rising less than expected.

One reason for the decline in the PPI index is the decrease in profit margins for wholesalers and retailers, confirming businesses' claims that they are losing pricing power, as well as recent discounts and promotions like Amazon's Prime Day. From restaurants to airlines, businesses are realizing that consumers are becoming increasingly picky in their spending, especially in discretionary purchases.

For most of the past year, the continued decline in commodity prices has brought some comfort to consumers. Core commodity prices (excluding food and energy commodities) saw the largest drop since the beginning of the year. On an annual basis, this is the largest decline since 2004.

Another report released on Wednesday, which combines inflation data and recent wage data, shows that the growth rate of real income in July slowed compared to the same period last year