US CPI Inflation Data: Will July Inflation Numbers Put the US Fed in a Tight Spot? 2024 update
US CPI Inflation Data: As the US Federal Reserve navigates a complex economic landscape, all eyes are on the release of July 2024 Consumer Price Index (CPI) data, set for August 14. The numbers are critical, with investors and market analysts keenly tracking the core-inflation figures, which significantly influence the Fed’s monetary policy decisions. The consensus among market experts suggests that headline inflation will likely remain unchanged at 3% from June 2024, with some predicting a slight decrease to 2.9%.
Fed’s Rate Cut Dilemma
The July and August CPI data are pivotal in determining the Fed’s approach to interest rates. Markets are currently pricing in a 50% chance of a half-point rate cut at the September 18 Federal Open Market Committee (FOMC) meeting and a 72% probability of a full point in rate cuts by the end of the year. This sentiment is underpinned by a decline in the US annual inflation rate to 3% in June 2024, the lowest since June 2023, alongside an unexpected 0.1% decrease in the monthly CPI.
Expectations and Economic Indicators
For July, economists forecast a 0.2% monthly increase in both the overall consumer price index and the core CPI, which excludes volatile food and energy prices. This would keep the 12-month CPI inflation rate steady at 3%, while core inflation is projected to drop to 3.2%, the lowest since April 2021. However, projections vary, with estimates for monthly price increases ranging from 0.1% to 0.3%, allowing room for unexpected outcomes.
Samer Hasn, Senior Market Analyst at XS.com, highlights the importance of monitoring various economic indicators, including producer prices, retail sales, housing market data, inflation expectations, and consumer confidence surveys. A significant slowdown in inflation could increase the likelihood of a broader rate cut this year, while a negative surprise might amplify concerns about the US economy’s health.
Recession Concerns and Market Reactions
Concerns about a potential US recession are escalating, with a new indicator by Pascal Michaillat and Emmanuel Saez, building on the Sahm rule, suggesting a 40% chance of an economic downturn. This rule measures the difference between the three-month moving average of unemployment and the past 12-month low, and it was triggered earlier this month following a rise in unemployment to 4.3%.
The stock market anticipates a volatile week, fueled by critical data releases and potential geopolitical shocks from the Middle East. The July CPI, alongside the rising jobless rate, could complicate the Fed’s ability to lower interest rates by September. Conversely, favorable data could lead to a market surge as the November elections approach.
Fed’s Path Forward
Dilin Wu, Research Strategist at Pepperstone, emphasizes the significance of Wednesday’s July US CPI and Thursday’s retail sales figures. A lower-than-expected inflation rate and stronger retail sales could pave the way for a 25 basis point cut at the next Fed meeting, potentially encouraging traders to embrace risk assets in a stable market environment.
At the last FOMC meeting, Fed Chair Jerome Powell expressed optimism about inflation’s trajectory toward the 2% target, allowing the Fed to focus on its secondary goal of maximizing US employment. However, the recent rise in unemployment to 4.3% has intensified speculation that the Fed may need to cut rates more aggressively to prevent a recession and achieve a soft landing. Market expectations point to a 100 basis point reduction in rates this year, aiming for a “neutral” level of 3-3.25% by mid-2025.
As the US economy grapples with mixed signals, the upcoming CPI data release will be crucial in shaping the Fed’s next steps, with potential implications for global markets and economic stability.
