After the June data unexpectedly rebounded to a new high since 1981, due to the recent decline in prices of commodities such as energy, the market generally expects inflation pressure to fall this month.

On Wednesday, the U.S. Department of Commerce will announce the July U.S. consumer price index (CPI). After the June data unexpectedly rebounded to a new high since 1981, due to the recent decline in the price of commodities such as energy, the market generally expects inflation pressure to fall this month.

For Feder , how to achieve a soft economic landing and maintain the stability of the employment market while suppressing prices is still the most practical challenge before.

Multiple factors alleviate price increases

Commodity decline and supply chain bottleneck relief are key factors affecting inflation expectations. According to a monthly survey released by the New York Fed on Monday, consumer inflation expectations for one-year in July fell from a record high of 6.8% to 6.2%, the three-year period fell from 3.6% last month to 3.2% in July, and the five-year period fell from 2.8% last month to 2.3%.

As the biggest driving force for this round of inflation in the United States, the sharp decline in energy prices has played a key role in the sharp decline in July. International oil prices have fallen to nearly half a year low due to market concerns about the global recession. At present, the average domestic gasoline price in the United States has fallen back from a historical high of more than $5, which was set in June to $4.18. Agricultural product prices have also eased with the restart of grain transportation in Ukraine. The reporter of First Financial News noticed that in the past month, US wheat futures fell by more than 10%, and corn and soybeans fell by nearly 3%.

Meanwhile, the New York Fed's Global Supply Issues Index report released last week said global supply chain pressure fell to its lowest level since January 2021 in July, which is now down more than 50% from its record high in December last year, but is still far higher than its pre-pandemic level. Supply chain issues have become a key issue in the global recovery from the pandemic and are also a challenge for the Federal Reserve and other major central banks to tackle inflation.

Latest Purchasing Manager Index (PMI) also shows the impact of improvement in supply and demand relationships on prices. Timothy Fiore, chairman of the Manufacturing Business Inquiry Committee of the American Society of Supply Management (ISM), said data from manufacturing shows that the fall in the new order index slowed down price pressures after strong growth in the past two years, with the manufacturer's price index falling to its lowest level since August 2020. Chris Williamson, global chief business economist at Standard & Poor's , pointed out that the price increase of raw materials and finished products continued to slow in July, further indicating that inflation has reached its peak.

Cleveland inflation forecasting tool Inflation Nowcasting shows that indicators including CPI, core CPI and personal consumption expenditure monthly rate (PCE) monthly rate are expected to decline in July, with the monthly rate of CPI from drop to 0.27%, and the year-on-year growth rate will fall to 8.8%. However, it should be noted that the expected CPI growth rate in August is also 8.8%, indicating that inflation may be difficult to fall rapidly.

Oxford Economic Research Institute Senior economist Bob Schwartz said in an interview with the First Financial reporter that expects this round of inflation to cool down, and the Federal Reserve will remain highly vigilant. He believes that in addition to commodity prices, we also need to pay attention to the signal of inflation spreading to the service industry. This is because the trend of service prices (hotels, entertainment, air tickets, etc.) is often easy to rise but difficult to fall, which will be a risk that inflation will become deeply rooted in the future.

Consumer spending is facing a test

Data released last month showed that the U.S. GDP (GDP) continued to shrink month-on-month, for the first time since the 2008 financial crisis, it fell into a technical recession. Affected by price pressure, consumer spending, as the main engine of the economy, has dropped to 1% year-on-year, but this is the smallest increase since the recovery of the epidemic. Schwartz told 1 Financial News that consumers have become cautious while maintaining spending due to signs of slowing in the U.S. economy. There is indeed a risk that excess savings may have a lower effect on supporting consumer spending than previously expected, and that future savings rates have a significant impact on the economic growth prospects.

US retail giant Walmart recently issued a performance warning, saying that inflation is having a huge impact on consumer spending, and the department store industry will face greater pressure in the second half of the year."People now have to pay for food inflation compared to the stimulus checks issued last year. Some customers are under pressure," Walmart CEO Doug McMillon said in a statement. Another retail giant, , Target , announced in early June that it would take measures including price cuts to reduce inventory surplus. Target CEO Brian Cornell said at the time that the company had expected a stimulus effect to slow down after the end of demand, but was caught off guard by the current cooling.

includes the Chamber of Commerce and the University of Michigan Consumer Confidence Index survey continues to be low. "Worries about inflation continue to suppress consumers." Lynn Franco, senior director of economic indicators at the Chamber of Commerce, pointed out that willingness to purchase durable goods such as cars, houses and major appliances all fell in July. "Looking forward with the next six months, inflation and interest rate hikes may continue to pose strong resistance to consumer spending and economic growth."

loan consumption has become the alternative . Data released by the Federal Reserve on the 5th showed that U.S. consumer loans rebounded sharply in June, adding $40.154 billion, the second highest monthly increase ever. Credit changes are usually an important weather vane for economic conditions. Last year, the recovery in credit in the United States mainly reflected the improvement of the economy, rising wages and a strong labor market. Consumers can borrow more money to buy new cars, vacations and other consumption.

However, high inflation and rising interest rates make the situation even more complicated. The purchasing power of household income in the United States is declining, and interest rate hikes mean people have to pay higher interest rates for credit cards, car loans and other large loans. If the economy continues to slow down, credit use may decline and consumers will often reduce spending, further exacerbating economic risks.

Schwartz believes that judging from the credit data, many people choose to support consumption through borrowing in the face of inflationary pressure. Despite other signs of a slowdown, the July employment report performed well, showing that job growth is broad and accelerating, and wage growth is also staying healthy driven by strong corporate demand. Under the current circumstances, the sentiment expressed by the consumer confidence index has not led to a decrease in daily expenditures, but the impact of inflation on consumption choices has begun to appear, which requires vigilance.

How the Fed chooses the path to raise interest rates

In order to cope with inflationary pressure, the Fed has raised interest rates by 225 basis points since March, setting the fastest policy tightening intensity since the 1980s. More than

Fed officials recently reiterated their tough policy stance. San Francisco Fed Chairman Mary Daly said that the Fed's path to combat inflation is "far from over" and will firmly commit to maintaining price stability. Chicago Fed Chairman Charles Evans said that the extent of interest rate hikes depends on whether inflation has improved. He prefers to slow down the pace after bringing interest rates closer to a slightly restrictive level on the economy, so as to avoid the Fed falling to the point where it has to cut interest rates faster due to interest rate hikes.

The latest non-agricultural data boosted the outside world's expectations of Fed rate hike . The 2-year U.S. Treasury yield, closely linked to short-term interest rates, rose by more than 30 basis points last week, the largest weekly increase in the past 10 years. At the same time, the potential risks of interest rate hikes to the economy have brought the inversion of the 2/10-year U.S. Treasury yield to a new high since 2000.

"The Fed will continue to work hard to curb inflation without putting the economy into recession." Moody's analytical economist Dante DeAntonio said, "Wage and price growth data will not help them in any way, because even if the overall economy has weakened, the upward pressure remains obvious."

Wells Fargo believes that the economy seems to be slowing down but not collapsing, which is consistent with the Fed's goal of cooling inflation. will raise interest rates by at least 50 basis points at its September meeting. If the inflation rate drop in the next two CPI reports is less than expected, it may raise interest rates by another 75 basis points. The bank believes that while inflation is expected to start slowing in the third quarter, it will take a long time to fully return to sustainable levels, so the road ahead of the economy looks bumpy.

Schwartz told the First Financial Daily that before a turning point is clear and the decline is falling, it will be difficult for the Federal Reserve to "relax" on the price issue, and the peak of inflation does not mean that the problem is solved. The Fed aims to see real signals, be sure that inflation is continuing to move towards 2%. On the other hand, the labor market has shown signs of volatility recently. Whether the interest rate hike is 50 basis points or 75 basis points in September, as interest rates continue to approach neutral levels, economic pressure and changes in consumer demand will cause the Federal Reserve to consider reducing the rate hike to 25 basis points starting in the fourth quarter, and may end the interest rate hike cycle in the first half of next year.