Summary of Key Points
This week, the focus of the U.S. economy is on the July inflation data (CPI and PPI). Although last week's unexpectedly weak employment figures (a decrease of over 100,000 jobs in July) reduced the likelihood of interest rate hikes, inflation remains the key factor determining whether the Federal Reserve will raise rates in September. Economists generally expect inflation to decline slightly (due to falling gasoline prices), but core service sector inflation may rise slightly. The probability of a rate hike in September has dropped from 60% to 45%. Experts are concerned about whether the slowdown in inflation is seasonal or a sign of a cooling economy, as well as potential risks such as the AI investment boom masking declines in other sectors and the delayed transmission of costs. They believe that any recession, if it occurs, could be mild, similar to the one in 2001.
Why Are Inflation Data More Important This Week Than Employment Reports?
The Federal Reserve's two main tasks are to "stabilize prices" and "maintain employment." However, inflation has not yet reached its target of 2% (it was 3.5% in June), so inflation data has a more direct impact on interest rate decisions. Last week's poor employment figures (a decrease of 23,000 jobs) made the market think that rates might not be raised, but the Fed is more concerned about whether prices have actually started to fall—after all, they raised rates previously to curb inflation. Therefore, the CPI/PPI reports on December 13 will have a greater influence on the outcome of the September meeting than the employment report.
What Are Expectations for July Inflation: Down or Up?
Most economists expect a "slight decline":
- Overall CPI: From 3.5% in June to 3.4% (due to falling gasoline prices and the temporary alleviation of the impact of the Middle East conflict);
- Core CPI (excluding volatile food and energy costs): From 2.6% to 2.5% (as housing costs are growing more slowly).
Citibank suggests that two consecutive months of declining inflation almost rule out a rate hike in September; however, Bank of America warns that core service sector inflation (such as dining and healthcare) could rise by 0.3% month-on-month, making a rate hike still possible. The futures market now expects a 45% probability of a rate hike in September, which is much lower than the 60% before last week's employment data was released.
Is a Decline in Inflation Temporary or a Sign of a Cooling Economy?
This is the main concern for the market:
- If the decline in inflation is merely seasonal (e.g., due to temporary drops in gasoline prices that will rise again later), the Fed may still raise rates;
- If it indicates a real economic slowdown, rate hikes would likely be postponed until December or even later.
Additionally, retail sales and consumer confidence data expected on the 14th are expected to be positive, indicating that Americans are still spending money and that the economy is relatively resilient, which reduces the likelihood of a significant economic slowdown.
What Hidden Risks Exist Behind the Economy?
Professor Freeman from Harvard University has identified several risks:
1. The AI investment boom masking declines in other sectors: Companies are investing heavily in AI, but construction investments (such as factories and offices) are declining outside of data centers. If the AI boom fades, economic support could weaken.
2. Delayed cost transmission: The costs of the Middle East conflict are initially borne by companies but will eventually be passed on to consumers, potentially leading to another rise in inflation.
3. Uneven distribution of profits and wages: Corporate profits have reached record levels, but the real wages of ordinary workers (after adjusting for inflation) have been eroded, especially for low-income groups.
4. The risk of a mild recession: If the AI bubble bursts, it could result in a minor recession similar to the one in 2001 (not the severe financial crisis of 2008), as the Fed would still have the ability to cut rates to support the economy.
Conclusion: Inflation Data Is the "Switch for Rate Hikes," but Risks Remain
This week's CPI/PPI data will directly influence the Fed's decision in September. If inflation declines as expected, there is a high likelihood that no rate hikes will be announced in September; if core inflation exceeds expectations, rates may still be raised. However, the risks associated with AI investment, delayed cost transmission, and wage inequality are potential concerns for the future economy, although they are currently masked by economic resilience. The general public does not need to panic too much, but they should be aware that declines in AI-related stocks could affect consumer and investment sentiment.