The US Consumer Price Index (CPI) is projected to see a modest increase in July, with declining gasoline prices serving as a key buffer. This outcome could further reduce financial market expectations for the Federal Reserve to raise interest rates this year.
A survey by economists indicates that July CPI is expected to rise by 0.1% month-over-month, reversing June's 0.4% decline (the first drop in six years). The annual rate is forecast to edge down to 3.4% from June's 3.5%.
Core CPI, which excludes food and energy, is anticipated to increase by 0.2% month-over-month (compared to no change in June), with the annual rate rising to 2.5%.
Falling oil prices offer crucial support. The average gasoline price in July fell to $4.064 per gallon, down from $4.184 in June and $4.609 in May. The US, a net oil exporter, combined with declining petroleum inventories, has partially mitigated the oil price shocks from Middle East conflicts.
Food prices are expected to rise only slightly, consistent with recent trends. Prices for goods like furniture and clothing are also set to increase modestly as the pass-through effects of tariffs weaken.
Inflation remains above the target, with risks tilted to the upside. Despite the moderate monthly gain, inflation is still clearly above the Fed's 2% goal. The core PCE price index, the Fed's preferred gauge, is projected to rise 0.2% month-over-month and hold steady at 3.3% annually. This leads some economists to still believe the Fed could hike rates in September.
Chicago Fed President Austan Goolsbee previously stated he is more concerned about inflation being too high than about labor market weakness. President Donald Trump has criticized Iran as a "sly negotiator" and hinted at possible stronger actions, keeping upside risks to inflation alive.
On consumer and political impacts, while the data is improving, price levels remain "too high and uncomfortable" for ordinary consumers. High living costs have already affected some voters' views of Trump and could become a disadvantage for Republicans in the November midterm elections. A key promise of Trump's 2024 victory campaign is precisely to lower inflation.
Overall, if July CPI meets expectations, it will reinforce the market consensus that the Fed will neither raise nor cut rates in the near term, unless employment and inflation both deteriorate significantly. Markets are closely watching the official data scheduled for release on Wednesday.
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Editor: Long Yunxiang
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