In July, the US CPI stopped "12 consecutive drops"

According to data released by the US Department of Labor on the 10th, the Consumer Price Index (CPI) rose 3.2% year-on-year in July, slightly higher than the 3% increase in June.

Data shows that in July this year, the US CPI increased by 3.2% year-on-year and 0.2% month on month, respectively, while in June, the CPI increased by 3% year-on-year and 0.2% month on month, respectively. Excluding volatile food and energy prices, the core CPI increased by 4.7% year-on-year in July, the lowest level since October 2021.

Three key inflation indicators for this month

Specifically, the main driving factor for the price increase in July was the increase in housing costs, followed by car insurance and education. The decline in prices of civil aviation tickets, second-hand cars, and healthcare has to some extent alleviated inflation.

Western Securities stated that there are three main factors driving inflation this month: ① Strong resilience in fundamentals due to Saudi Arabia Russia fulfilling its production reduction commitments, supply side tightening, summer peak travel season for US residents, and near end of US interest rate hikes. Improved supply and demand have driven a rebound in WTI crude oil prices since July, leading to a month on month and year-on-year price rebound in transportation services; ② Core commodity prices have slowed down and regained speed. The weakening of the growth rate of new and used car prices may mean that the overall trend of economic demand slowdown remains unchanged; ③ The decline of core services is relatively slow. From the perspective of rent, the main rental housing prices have slowed down significantly, but the equivalent rent of self owned housing has rebounded month on month, resulting in only a slight decrease in year-on-year growth rate. In addition, due to the impact of exceeding expected hourly wages in July, the year-on-year growth rate of entertainment communication, educational communication, and entertainment services has strengthened.

Kaiyuan Securities pointed out that the month on month growth rate of overall inflation and core inflation has not increased compared to June, or reflects the relatively weak rebound in inflation in the United States, and the Federal Reserve's disinflation process is still relatively smooth. However, it should be noted that the high base effect may continue to weaken in the future, inflation levels will continue to rebound, and the Federal Reserve's inflation target has not yet been achieved.

Shen Wanhongyuan stated that although the overall US CPI in July was slightly lower than expected, core inflation is still relatively resilient, especially in the core service sector, which may still support the Federal Reserve's expected interest rate hike within the year. In the second half of the year, there are still three major factors that may delay the downward trend of US inflation: ① excess savings, fiscal support for household income and consumption; ② Under the tightening of supply and demand, crude oil prices have rebounded; ③ Rent inflation eased slower than market expectations in the third quarter.

Core CPI will rapidly decline

China Merchants Securities believes that the core CPI of the United States will rapidly decline and may drop to around 2% from the end of this year to the beginning of next year. The institution stated that it had previously mentioned that there may be a divergence in the subsequent trends of the overall US CPI and core CPI. Looking back, ① due to base factors and the rebound in oil prices, the overall CPI forecast for the United States is assumed to be 0.1% month on month, and the year-on-year CPI data for August December should be 3.4%, 3.2%, 2.9%, 3.1%, and 3.6%, respectively. ② For the prediction of the core CPI in the United States, due to the statistical lag of rent items, assuming a slowdown from 0.4% in July to 0.0% month on month, the core CPI for August to December will fall back to 4.1%, 3.5%, 3.2%, 2.8%, and 2.4%, respectively.

UBS expects that as the deflationary forces of seasonal factors disappear, the month on month increase will rebound throughout the autumn. Nevertheless, due to the downward trend in rental prices, the decline in second-hand car prices, the easing of supply conditions, and the slowdown in wage growth, the core CPI increase is expected to remain within the range of 0.2% -0.3% for the remaining period of this year. In the coming months, the overall US CPI will increase year-on-year, while the core CPI will decrease year-on-year

Kaiyuan Securities believes that as the high base gradually disappears, the overall inflation level may continue to rebound in the short term, and the inflation level in July may be at a low point within the year. In terms of core inflation, as the summer vacation has not yet ended, inflation in transportation and other services may remain resilient, leading to an increase in super core service inflation. However, under the drag of the continuous decline in core commodity prices, the trend of core inflation continuing to decline may be difficult to change, and its uncertainty lies only in the slope of the decline.

The necessity of raising interest rates in September has decreased

After the above data was released, the Federal Reserve Watch tool of the Chicago Mercantile Exchange Group (CME) showed that the probability of the FOMC maintaining interest rates unchanged at the September meeting increased from 87% to 91%, and the probability of a 25 basis point rate hike decreased from 13% to 9%.

The Chief Economist of CITIC Securities clearly believes that the downward trend in US inflation since the beginning of this year is more in line with expectations, with core inflation slowing down for nearly two months on a month on month basis. The probability of the Federal Reserve raising interest rates for the last time in July is high, and the 10-year US bond interest rates fluctuate in the short term or at high levels.

CICC believes that the second consecutive month on month increase of 0.2% in core CPI is a positive signal, but the rebound in energy prices indicates that slowing inflation is not always smooth sailing. The necessity for the Federal Reserve to raise interest rates in September has decreased, with expectations that the Fed may "skip" September and the next rate hike may take place in the fourth quarter.

Huatai Securities pointed out that the combination of weak inflation and previously weak non farm data makes it less necessary for the Federal Reserve to further raise interest rates, and the probability of the Federal Reserve raising interest rates in September and beyond may be less than 50%. However, considering that the US momentum has improved beyond expectations and fiscal spending has continued to expand, the breakeven inflation in 5y5y has continued to rise. If wages and inflation rebound again, the possibility of the Federal Reserve turning into an eagle cannot be ruled out.

Caitong Securities stated that after the release of July inflation data, the market's expectations for the Fed's interest rate hike path have not changed significantly. As the job market continues to slow down and inflationary pressures improve, interest rate hikes have come to an end. The probability of further rate hikes within the year is unlikely, and the timing of rate cuts still needs to be observed. As the scale of treasury bond issued by the Ministry of Finance in the third quarter exceeded expectations, the yield of 10-year treasury bond will remain volatile in the short term, but with the end of the interest rate increase cycle, the yield will start a downward cycle. Similar to US Treasuries, the US dollar index may fluctuate in the short term, while there is also downward pressure in the long term.