Countdown to CPI, how do Goldman Sachs analysts view it?

The United States will release the August CPI inflation report tonight at 8:30. Goldman Sachs predicts that the core CPI in August will increase by 0.23% month-on-month and 3.17% year-on-year; the overall CPI is expected to increase by 0.18% month-on-month and 2.56% year-on-year.

The bank's forecast for the core CPI in August is higher than the average speed of the past three months by 0.13%, as the lower readings in the previous months benefited from significant declines in airfare and used car prices, with average declines of 3.4% and 1.1% respectively. In August, Goldman Sachs expects airfare to rebound slightly, while the decline in used car prices will be more moderate. The bank also predicts a steady increase in car insurance prices. In addition, after a sharp increase last month, Goldman Sachs expects housing inflation to ease.

In detail, Goldman Sachs emphasizes the trends of two key components in this month's CPI report. First is car insurance, with the bank expecting car insurance prices to continue to rise by 0.7% in August, reflecting the ongoing increase in premiums, although the growth rate has slowed down. In comparison, the average monthly increase in car insurance prices from 2024 to date is 1.2%. Higher car prices, maintenance costs, medical expenses, and litigation costs have forced insurance companies to raise premiums, but due to the need for insurance companies to negotiate price increases with state regulatory agencies, the time it takes for premium increases to be passed on to consumers is longer. Currently, the gap between premiums and costs has narrowed.

Therefore, Goldman Sachs expects that the growth rate of car insurance prices in the CPI will return to pre-pandemic levels by next year. It is worth noting that car insurance has a small weight in the PCE index, and its data source is different, so Goldman Sachs does not believe that these changes will have a significant impact on PCE inflation.

The second component is housing. Following a significant increase in July, Goldman Sachs expects housing inflation to ease, with Owners' Equivalent Rent (OER) rising by 0.33% and primary rent rising by 0.29%. Looking ahead, Goldman Sachs believes that the slightly stronger growth in single-family residential rents may lead to OER growth surpassing regular rents in the CPI. The bank predicts that by December 2024, overall housing inflation will maintain a monthly growth rate of about 0.3%.

In addition, Goldman Sachs also expects a slight boost in this month's CPI data as medical service inflation rebounds after a significant decline in July and the mid-July increase in postage prices (not fully reflected in last month's report).

Goldman Sachs' Senior Market Advisor Dom Wilson believes that the market has shifted its focus from economic growth to inflation concerns, so the CPI data is not receiving the same level of attention as before. Recent fundamental inflation performance has been mild, and the market may be more sensitive to data that exceeds expectations. The analyst believes that there is some downside risk to tonight's CPI, but also thinks it may not resolve the ongoing debate in the market about the extent of rate cuts. Goldman Sachs' Shawn Tuteja, responsible for ETF/basket volatility trading, believes that the market's current focus is on two key themes: 1) whether the Fed is behind the curve, and 2) the U.S. election. He points out that the importance of tonight's CPI may be greatly discounted, but even a very low CPI reading is unlikely to prompt the Fed to cut rates by 50 basis points in September. And if the CPI is significantly higher than consensus, he believes that the unwinding in cyclical sectors will be larger compared to the technology sector.

On the other hand, Joe Clyne, in charge of index volatility trading, points out that the volatility backdrop for this month's CPI is very different from what has been seen on other key data release days this year. Ahead of this CPI release, the baseline volatility levels are higher, and the volatility skew is steeper, indicating market concerns about growth prospects and the belief that the Fed may be behind the curve. His trading team agrees with other analysts that, for the market, the FOMC is a bigger catalyst than the CPI. However, he still believes that lower CPI readings may alleviate concerns in the market about the Fed's potential ability to cut rates in line with market expectations.

Looking ahead, Goldman Sachs expects the remaining monthly core CPI inflation rate for the year to be around 0.2%. In terms of market reaction, Goldman Sachs' view is that a reading close to expectations would be the best outcome, helping the market navigate recent risks and temporarily reducing stock market volatility, but if the data significantly exceeds or falls short of expectations, it could lead to more uncertainty in the Fed's rate-cutting path or U.S. economic growth.