On August 14, the US Bureau of Labor Statistics released the CPI data for July, which rose by 2.9% year-on-year, falling back to the "2-digit" range for the first time since March 2021, slightly lower than market expectations. At the same time, the core CPI rose by 3.2% year-on-year in July, the lowest growth rate since the beginning of 2021 and in line with market expectations. The core CPI growth rate has fallen for the fourth month, which means that a rate cut in September may be a foregone conclusion.

For the first time since 2023, rental inflation has shown an upward trend. Some analysts said that although the downward trend of the core CPI provides conditions for a rate cut, the rise in rental inflation may make the Federal Reserve more cautious in formulating monetary policy.

CPI data is basically in line with market expectations

The US CPI data for July was generally in line with market expectations, but did not show the obvious downward trend expected by the market. Specifically, the monthly rate of unadjusted CPI in July was 0.2%, and the monthly rate of seasonally adjusted CPI was also 0.2%, both in line with expectations, while the monthly rate of seasonally adjusted core CPI remained at 0.2%, in line with expectations. These data show that although overall inflation has slowed down, the stability of core inflation indicates that inflationary pressure has not been completely relieved.

Among the sub-items, the decline in used car prices contributed the most to the downward trend of core inflation, while prices of medical, entertainment goods, new cars and clothing also declined. However, housing, transportation and entertainment services continued to fuel inflation growth, especially the stickiness of rent and owner equivalent rent, which led to a slight increase in housing inflation, becoming a key factor in the difficulty of a significant decline in month-on-month inflation.

It is worth noting that super core service inflation rose by 0.21% this month. This mild increase contrasted with the slight decline in May and June, becoming another important reason for market disappointment. The market originally expected a more significant decline in inflation, but the actual data showed that the downward speed of inflation was slower than expected.

Is a rate cut inevitable? Is the decline the key?

The issue that traders are most concerned about right now is the Fed's decision to cut interest rates at its September meeting: whether to choose a traditional 25 basis point rate cut or to take more aggressive measures. Jack Mcintyre, a global investment manager, pointed out that although the US CPI data is crucial for economic analysis, its importance ranks behind employment and retail sales in terms of market influence. He stressed that inflation alone is unlikely to determine the specific extent of the rate cut, but those growth-oriented economic statistics, especially labor statistics and employment, will have a decisive impact on the Fed's decision.

With the July data of the Fed's preferred inflation indicator, the Personal Consumption Expenditure Index (PCE), to be released on August 30, and the August CPI report scheduled to be released on September 11, the release time of these two key reports is close to the Fed's September interest rate meeting, only one week apart. Market participants are closely watching the release of these data because they will directly affect the Fed's final decision on the issue of rate cuts. These upcoming data releases will undoubtedly be the key to the market's insight into the Fed's next monetary policy move.

Is the possibility of a recession in the United States high?

Both Goldman Sachs and JPMorgan Chase's analytical models point out that although the probability of a recession is not currently seen as high, the probability of this risk has increased significantly compared with past forecasts. The main basis for this forecast includes the trend of US Treasury bonds and the performance of the stock market, which is sensitive to changes in the business cycle.

Goldman Sachs' analysis points out that the current stock and bond market expectations for a US recession have risen to 41%, an increase from 29% in April. This upward revision of expectations reflects the market's expectations of the Fed's possible aggressive interest rate cuts and the possible lag reaction of stock prices, which are highly sensitive to the business cycle.

JPMorgan Chase's model also shows that the probability of a recession has risen to 31%, an increase of more than 10 percentage points from 20% at the end of March. In addition, the probability of a recession reflected by the interest rate market even exceeds the expectations of the stock market in the Goldman Sachs and JPMorgan Chase models. Goldman Sachs' model predicts that based on the 12-month forward change in the Fed's benchmark interest rate, the probability of a recession next year is as high as 92%. JPMorgan Chase & Co.'s model predicts a 58% chance of an economic slowdown based on changes in five-year U.S. Treasury yields.