Today at 20:30, the US Bureau of Labor Statistics will release the US Consumer Price Index data. The annual CPI rate is expected to fall to 3.8% from a previous reading of 4.2%, with the primary basis being an easing of geopolitical tensions. The core annual CPI rate, which excludes food and energy, is expected to remain unchanged at 2.9%, largely due to a lack of significant impact from energy and food prices. The monthly CPI rate for June is forecasted to decline from 0.5% to -0.1%, while the core monthly CPI is anticipated to hold steady at 0.2%.
Key Focus of the Data Release
The main point of interest in this data release is the magnitude of the decline in both the annual and monthly CPI rates. If the drop exceeds the expected 0.4 percentage points, it would signal a rapid cooling of US inflation, potentially exerting significant pressure on the US dollar while benefiting US equities. Conversely, if inflation does not recede noticeably, coupled with a resurgence of Middle East geopolitical issues, it could reignite expectations for the Federal Reserve to raise interest rates.
WTI Price and US CPI Correlation
WTI crude oil prices and the US annual CPI rate show a clear positive correlation. Between 2021 and 2022, both surged simultaneously, with soaring oil prices directly pushing inflation to high levels. After 2023, the retreat in oil prices led to a gradual cooling of CPI. From 2025 to 2026, CPI fluctuations mirrored the volatility in oil prices, confirming that energy prices are a significant driver of US inflation. From a long-term trend perspective, WTI oil prices act not only as a coincident indicator for inflation but also as a leading signal. Since 2020, each significant rebound in oil prices has preceded a rise in CPI by one to two months. This suggests that if current oil prices remain in a low, fluctuating range, core inflation could potentially fall further towards the 2% target, creating room for the Federal Reserve to implement multiple interest rate cuts within the year.
Geopolitical Risk Factors
Risk lies in Middle East geopolitical issues. On June 25th, an Iranian drone attacked a commercial vessel, followed by US strikes on Iran. To this day, conflicts between the US and Iran around the Persian Gulf coast continue, with Iran announcing a blockade of the Strait of Hormuz and the US resuming strikes on Iranian nuclear facilities. Influenced by these developments, international oil prices have climbed back above $80 per barrel. Even if the June annual CPI rate shows a significant decline, the CPI for July could potentially rise again.
Federal Reserve Policy and Bond Yields
The Federal Reserve's benchmark interest rate and the US 10-year Treasury yield are highly interconnected. During the Fed's tightening cycle, short-term policy rates rise rapidly, pulling up long-term yields; during easing cycles, they move downward in sync. Currently, the 10-year Treasury yield has rebounded to around 4.63%, while the Fed's rate remains in a plateau phase. The Federal Reserve's monetary policy determines long-term Treasury yields, suggesting the possibility that Treasury yields could revert towards the Fed's rate. The current situation, where Treasury yields are above the Fed's 3.75% rate, implies the potential for future corrective rate cuts by the Federal Reserve.
If the US inflation rate can retreat to around the 2% moderate level, the Federal Reserve's willingness to cut rates would significantly increase. The uncertainty lies in how long the disagreements between the US and Iran on Middle East issues will persist. If the Strait of Hormuz remains blocked, or if a pattern of reopening and re-blocking occurs, supply in the international energy market could remain constrained for an extended period. This would substantially increase the difficulty of bringing down the US inflation rate.
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