Summary of Key Points
The inflation data for July in the United States exceeded market expectations, remaining above the Federal Reserve's 2% target for the 65th consecutive month. Coupled with a slowdown in consumer spending and increasing economic pressures, the Fed is faced with a dilemma: raising interest rates could weaken the economy further, while not raising them could prevent inflation from falling. The upcoming speech by Fed Chairman Jerome Powell at Jackson Hole has become a focal point for the market, as everyone is eager to know the policy signals he will convey. The September CPI report will be crucial in determining the Fed's next move.
1. Inflation in July Was Higher than Expected, with Service Prices as the Main Driver
The Fed's preferred PCE inflation index rose 3.7% year-on-year (expected 3.6%) and 0.2% month-on-month (expected 0.1%). Excluding the volatile food and energy components, core PCE inflation rose 3.3% year-on-year, in line with expectations.
- Commodity Prices Have Declined: Energy prices, such as gasoline, fell by 2.7%, and durable goods like furniture fell by 0.9%, dragging down overall commodity prices.
- Service Prices Are Rising: Prices in the financial and insurance sectors rose by 1.2%, and housing costs increased by 0.3%, which are the main reasons for the high inflation levels.
- Old and New Threats to Inflation: The previous conflict with Iran disrupted 20% of oil supply, causing oil prices to soar and driving inflation to 4.1% in May. Although the intensity of the conflict has decreased and oil prices have dropped, the breakdown in U.S.-Canada trade negotiations has led to the U.S. imposing tariffs on $20 billion in Canadian goods, potentially triggering more retaliatory tariffs and adding new pressure to inflation.
2. Consumers Are Spending Less, and Economic Growth May Be Weaker
Consumer spending in July only increased by 0.2%, and commodity consumption has declined for two consecutive months.
- Why Less Spending?: Firstly, gasoline prices have decreased, resulting in reduced spending on this item in the data, which makes overall consumption appear weaker. Secondly, during the period of high inflation, people used their emergency savings, and now they are saving again, with the savings rate rising from 2.6% to 3%.
- Income Growth Cannot Keep Up with Inflation: Income increased by 0.4% in July, with a year-on-year increase of 3.7% over the past 12 months, which is exactly in line with inflation, meaning real income has not increased.
- A Slowing Economy?: Consumption is the "engine" of the U.S. economy (accounting for over 70% of GDP), and a slowdown in consumption suggests that third-quarter economic growth may be weaker than the 1.5% in the second quarter (below the long-term trend).
3. Disagreement Within the Fed: Raise Interest Rates or Not?
In July, most Fed members voted to keep interest rates unchanged (3.5%-3.75%), but the number of dissenting members is growing.
- R理由 of the Dissenters: Inflation has exceeded the target since February 2021, and if interest rates are not raised, inflation will never return to 2%.
- The Dilemma: Raising interest rates can curb inflation but may harm consumption and the economy; not raising them will prevent inflation from falling. Everyone is watching Powell's speech on Friday to see which side he will take.
4. The Market Is Waiting for Signals, but They May Be In vain
U.S. Treasury yields have reached new highs since 2007 (10-year, 30-year bonds), as investors doubt the Fed's commitment to reducing inflation and are concerned about the high level of government debt. The Treasury Department has stated it will increase bond purchases, but the market believes this is ineffective.
- Increasing Expectations of Rate Hikes: After the release of the data, the probability of a rate hike in September rose from 36% to 44%, and traders believe a hike is inevitable by the end of the year.
- Powell May Be Playing a Strategic Game: Morgan Stanley suggests that Powell has been reluctant to give clear signals and that his speech may not explicitly state whether interest rates will be raised, leaving the market to make its own guesses.
5. What to Look Forward to: The September CPI Report Is Crucial
The current inflation data does not show any signs of a sustained decline. The next CPI report, due to be released on September 11, will be a key factor in the Fed's decision-making.
- Wall Street's Consensus: Unless inflation significantly declines, the Fed is likely to resume raising interest rates. For example, the chief economist at Nationwide believes that the Fed is ready to raise rates at any time unless inflation shows signs of weakening.
In short, the inflation data for the next two months and Powell's stance will determine whether the U.S. will continue to raise interest rates, which in turn will affect the global economy and markets.