Summary of Key Points
The U.S. Producer Price Index (PPI) and Consumer Price Index (CPI) for July both exceeded expectations, mainly due to the decline in gasoline prices. As a result, markets believe that the Federal Reserve (Fed) is likely to maintain interest rates unchanged in September, with any potential hike being postponed until December. However, there is concern about the risk of oil prices rebounding (the July data did not account for the increase at the end of the month), and subsequent inflation figures, as well as factors such as the Middle East situation and mid-term elections, could still change the policy direction.
Detailed Analysis
1. Why Did the July Inflation Data Provide Relief to Markets? – Lower Energy Prices Were the Key Factor
PPI represents the cost for businesses to purchase raw materials and semi-finished products, while CPI reflects the retail prices for consumers. Both indicators fell:
- PPI: There was no month-on-month increase in July (expected to rise by 0.2%), but the core PPI (excluding food and energy) rose by 0.2% (expected to be 0.3%). The year-on-year increase was also lower than in June.
- CPI: The month-on-month increase was only 0.1%, and the core CPI (excluding food and energy) returned to pre-Russian-Ukraine conflict levels.
Main Reason: The decline in gasoline prices pulled down overall inflation figures, and prices of semi-finished products and raw materials also continued to fall (for example, raw material prices dropped by another 1.8% in July), indicating that businesses are experiencing slower cost increases, which means retail prices are unlikely to rise significantly in the future. Economists at UBS even suggest that the peak of inflation this year may have passed.
2. Improving Inflation → No Fed Hike in September? Markets Vote “Likely Not”
The Fed raises interest rates to cool down the economy and curb inflation. Now that inflation has eased, markets have quickly adjusted their expectations:
- Using CME tools, the probability of keeping interest rates unchanged in September increased from 40.6% on Wednesday to 67.6%, while the probability of a hike dropped to 32.4%. People think that any hike will likely wait until December.
- Expert Opinions: Capital Economics says the likelihood of a September hike has significantly decreased, and Morgan Stanley also mentions a continuation of the “no-hike” narrative in the market.
In short, current data supports the Fed’s decision to take a pause on raising rates.
3. The Concern: Could a Oil Price Rebound Interrupt the Inflation Reduction?
The July data looks good, but there is a time lag: PPI data was primarily collected in early July, and oil prices rose significantly at the end of the month due to the Middle East situation, which was not reflected in the figures.
If oil prices continue to rise (for example, if the conflict in the Middle East escalates), businesses’ costs will increase again, ultimately affecting consumers. Therefore, when the Fed meets next month, it will certainly pay close attention to changes in energy prices—this is key to whether inflation can continue to ease.
4. Is Inflation Still Linked to the Mid-Term Elections in November? – The “Pressure Point” for the Trump Administration
High living costs have led to public dissatisfaction with the Trump administration, and the mid-term elections in November will determine who controls Congress (which oversees legislation). Trump hopes to win the 2024 election by lowering inflation, with energy prices being a critical factor:
- The U.S. is currently a net oil exporter and has released oil reserves to buffer price increases, but institutions warn that these reserves are not sustainable—future replenishment may lead to further price increases.
- If oil prices rise again, inflation will increase, exacerbating public dissatisfaction and potentially affecting election results.
5. Policy Prospects: What Other “Uncertainties” Exist?
Although there is currently an expectation of no hike in September, the situation is not set in stone:
- Subsequent Data: There will be another round of inflation reports before the September meeting. If the data is poor (for example, if rising oil prices cause CPI/PPI to rebound), the Fed may have to raise rates again.
- Within the Fed: Some officials, such as the Cleveland Fed chairman, still advocate for raising rates to achieve the 2% inflation target.
- Political and Economic Balances: The new Fed chair may initiate a rate hike as part of his first actions, but the president could pressure for a cut (fearing that the economy cannot withstand aggressive rate hikes). The economy itself is also unlikely to tolerate drastic rate increases.
In summary, inflation has temporarily eased, and the Fed is likely to refrain from raising rates in September. However, oil prices and future data are key uncertainties, along with the impact of the Middle East situation and elections. Ordinary people don’t need to panic too much, but they should be aware of the indirect effects of energy price changes on living costs.