Data Overview

The US July CPI rose 3.4% year-on-year, while the core CPI increased 2.5% year-on-year, both continuing a downward trend.

Market Reaction

The US Dollar Index and the 10-year Treasury yield initially fell, while US stocks and gold rose before entering a period of consolidation.

Key Events

July's US CPI continued its decline, with the core inflation year-on-year rate holding near the relatively low levels seen in the fourth quarter of last year. This inflation data, which met expectations, combined with the broadly cooling non-farm payroll data, will undoubtedly shift the Fed's reaction function, reducing the weight placed on inflation and increasing it on employment. With this in mind, the central bank is essentially certain to hold rates steady in September.

Core Analysis

The July CPI year-on-year rate continued to fall, driven by simultaneous declines in food, energy, and core inflation. The headline CPI rose 3.4% year-on-year, matching the consensus estimate of 3.4% and down from the prior month's 3.5%. Month-on-month, it increased 0.1%, aligning with the consensus of 0.1% and a shift from the previous -0.4%. The core CPI rose 2.5% year-on-year, in line with the consensus of 2.5% and down from 2.6% previously. The month-on-month core CPI rose 0.2%, matching the consensus of 0.2% and a rebound from the previous 0.0%. The July CPI month-on-month rate turned positive. In the sub-items, the food price month-on-month growth rate slowed to 0.1% (contributing +0.01% to the CPI month-on-month). Energy prices remained in deflation for a second consecutive month, with the month-on-month decline narrowing to -1.5% (contributing -0.12% to the CPI month-on-month), providing less upward pressure on inflation than expected. Excluding food and energy, the core CPI rose 0.2% month-on-month, providing the primary support for the headline CPI's recovery. In core inflation, the contribution from core goods turned positive, reversing the deflationary trend of the previous two months, driven by positive contributions from used cars, clothing, and new car prices this month. The month-on-month rise in core services prices rebounded to 0.2%, primarily supported by contributions from items like medical services, transportation services, and education. Notably, the shelter price, which has the largest weight, saw a mild 0.0% month-on-month change. It is worth noting that the core services price excluding shelter rose 0.34% month-on-month, indicating that the abnormal performance in the previous month's volatile components has been corrected. This continued decline in the inflation report has further reduced the probability of a September rate hike. Following the data release, the US Dollar Index and 10-year Treasury yield initially fell, while US stocks and gold rose before consolidating. This suggests that even data aligned with expectations cannot fully dispel the market's pricing of rate hikes. Currently, there is a clear divergence within the Fed regarding rate hikes and forward guidance. The new chairman's increasingly apparent "political" label has also prompted the opposing camp—those defending the Fed's independence—to continuously "lower the bar" for rate hikes, aiming not necessarily for policy implementation but to restore the dollar's credibility. Therefore, with the Fed's reaction function still broadly pointing to inflation, moderate but below-target inflation data is unlikely to change the current situation where a rate hike, though difficult to implement, remains a persistent pricing factor.