Wall Street Review CPI: Housing inflation heating up does not hinder the trend of interest rate cuts, still uncertain about a 50 basis point rate cut in September

The U.S. CPI in July increased by 2.9% year-on-year, lower than the expected and previous value of 3%, marking the first time the U.S. CPI has dropped below 3% since 2021. The core CPI in July continued to decline for the fourth consecutive month, reaching the slowest growth rate since the beginning of 2021. Wall Street analysts have indicated that this may further pave the way for a 25 basis point rate cut by the Federal Reserve in September. The next focus for the Federal Reserve will be on the labor market, and if employment remains weak, a larger 50 basis point rate cut may be necessary. Analysts mentioned that although housing inflation has stopped declining, it is not a major concern.

Lindsay Rosner, Head of Diversified Fixed Income at Goldman Sachs Asset Management, stated that the July CPI data "cleared the way" for a 25 basis point rate cut by the Federal Reserve in September, but at the same time, it "did not completely rule out" the possibility of a 50 basis point rate cut.

Gennadiy Goldberg from TD Securities commented that this does provide support for a rate cut in September. The Federal Reserve needs to decide whether to cut rates by 25 or 50 basis points, providing the Fed with the greatest flexibility. The Federal Reserve will now focus on the labor market, including the non-farm payroll report on September 6th and weekly jobless claims data.

Chris Larkin, Director of Trading and Investing at E-Trade, mentioned that today's inflation data will not have a significant impact on the market. The main question now is whether the Federal Reserve will cut rates by 25 or 50 basis points next month. If the data over the next five weeks indicates an economic slowdown, this may prompt the Fed to cut rates by a larger margin.

Paul Ashworth, Chief Economist at Capital Economics, stated that the July CPI report is somewhat encouraging, providing support for a 25 basis point rate cut in September, but it does not indicate a sharp decline in price pressures, enough to warrant a larger 50 basis point rate cut. Based on the CPI and yesterday's PPI report, the monthly increase in PCE should be 0.17%. This is only slightly higher than the average level before the COVID-19 pandemic, but essentially shows price stability.

He also mentioned that the sharp rebound in housing costs in July is a "disappointing" detail, but not a major concern.

Anna Wong and Stuart Paul from BE stated that the good news from the July CPI report is the moderate performance of core indicators. However, inflation in certain core service categories, including housing rents and car insurance, remains high. This could have complex implications for the Federal Reserve's preferred price measure, the core PCE price index. If our predictions are correct, combining the CPI data with the encouraging moderate PPI data in July will mean an accelerated increase in the core PCE price index on a monthly and annual basis in July. However, this will not prevent the FOMC from cutting rates by 50 basis points at the September meeting. With the rising unemployment rate - which we expect to reach 4.5% by autumn, possibly before October - the Federal Reserve will increasingly focus on its dual mandate employment target Fitch Ratings' Chief Economist Brian Coulton stated that a rate cut in September is already a certainty:

"Overall, the quarterly annualized figure for core inflation has dropped to 2.3%. This data is significantly lower than the levels seen in the first four months of this year. In recent months, the confidence of the Federal Reserve has been gradually recovering, and this data will further strengthen that confidence, helping to solidify the decision for a rate cut in September."

Bryce Doty, Portfolio Manager at Sit Investments Associates, commented:

"With CPI month-on-month growing as expected at a manageable 0.2%, the year-on-year growth rate for core CPI has decreased to 3.2%, which is sufficiently low for the Fed to cut rates while still maintaining a very high real interest rate. This allows the Fed to cut rates while claiming that the higher real interest rate acts as a restraint and helps further reduce inflation."

Financial analyst Jamie Cox from Harris Financial expressed:

"The momentum for a rate cut by the Fed in September is clear, and if this trend continues, the Fed will have enough room to further cut rates this year."

However, some believe that the importance of Thursday's retail data outweighs that of CPI and needs to be continuously monitored. Macro EQ Vol trader Shawn Tuteja commented:

"I believe that the impact of CPI on the US stock market is diminishing, and the volatility market seems to agree with this view. The narrative has now completely shifted to whether the economic slowdown is faster than the Fed's reaction speed (i.e., whether the Fed is already behind the curve?), so we place more emphasis on retail data (to be released on Thursday) rather than this month's CPI."

Senior Economic Analyst Mark Hamrick from Bankrate stated,

CPI data is "good news," but people are still grappling with overall higher prices. There is increasing evidence that consumers are struggling under the combined pressures of high prices, high interest rates, and a cooling job market. Even if the data shows 'as expected,' prices have been generally rising over the past month