The final key piece of the puzzle before the Federal Reserve's interest rate dec

On the 11th local time, the United States will announce the Consumer Price Index (CPI) for August.

The speech by Federal Reserve Chairman Powell at the Jackson Hole Global Central Bank Annual Meeting last month was widely interpreted by the market as setting the tone for a policy shift in September. However, with employment data showing some fluctuations, there is still uncertainty over whether the first interest rate cut will be by 25 or 50 basis points. The CPI report will be the last key piece of data before the September decision, and if it meets market expectations, it could establish a foundation for the start of a new easing cycle.

Will the trend of inflation decline continue?

After a brief rise in the first quarter of this year, U.S. prices have shown a downward trend. In July, the U.S. CPI increased by 2.9% year-on-year, down 0.1 percentage points from June, and the core CPI rose by 3.2%, marking the smallest year-on-year increase since April 2021.

First Financial has summarized that currently, Wall Street institutions predict that the overall CPI in August is expected to further decrease to 2.6%, getting closer to the Federal Reserve's medium-term target. The main factor is the significant drop in gasoline prices, which were affected by recession fears and demand concerns, with international oil prices falling by more than 5% last month. At the same time, food inflation changes are minimal, and grocery prices remain stable.

In addition, the market expects the core CPI to grow moderately by 0.3% in August, mainly due to the continued rebound of some more volatile "super core" components, with the year-on-year growth rate remaining at 3.2%.

After rebounding in July, whether housing costs (rents) can cool down again is worth paying attention to. Driven by the Federal Reserve's interest rate cut expectations, mortgage rates have fallen, and the U.S. real estate market has shown a trend of stabilization recently. However, the increase in apartment vacancy rates last month and the decline in the Bureau of Labor Statistics' all-renter rent index may indicate downward pressure on rents.

In a report sent to First Financial journalists, Wells Fargo stated that the monthly rate rebound may be driven by stronger commodity prices and robust growth in non-housing services. After significantly dragging on core commodity prices in the past two months, used car prices may become a force in August, followed by a noticeable increase in September, indicating that the deflationary momentum of goods may have already peaked.

On the other hand, the bank expects non-housing services to rebound from 0.2% in July to 0.4% in August, which may reflect some noise. After the largest ever drop in hospital service prices, prices are expected to stabilize and rise last month. At the same time, after air ticket prices fell for five consecutive months and returned to pre-pandemic levels, the volatile prices of travel services seem to be brewing a rebound.

Looking ahead, the Cleveland Fed model shows that U.S. inflation is expected to continue to trend down in the coming quarters, but it will remain higher than the Federal Reserve's target. However, this will not become an obstacle to a shift in monetary policy, as unit labor costs are below 2%, highlighting that labor market conditions no longer pose a threat to the Federal Reserve's inflation target. Although the cooling speed of service inflation has always been lower than that of goods inflation, it is expected to benefit from the slowdown in the growth of physical input costs in the future.How will the Federal Reserve make decisions?

At the end of August, at the Jackson Hole Global Central Bank Symposium, Powell sent the most explicit message to date that the time for policy adjustment has come. After emphasizing the dual mandate and affirming progress in inflation, avoiding further cooling of the job market has become the catalyst for interest rate cuts.

From recent statements, Federal Reserve policymakers hope that the rate cut can promote a soft landing for the US economy. In past monetary tightening cycles, examples of recessions often overlap with a surge in unemployment rates.

Starting in the second half of this year, the previously stable job market began to change, and Federal Reserve officials are increasingly concerned about the risks of maintaining monetary policy too tight for too long. The July US non-farm employment report triggered a global panic, with a 4.3% unemployment rate triggering the recession-indicating "Sam Rule". Chicago Federal Reserve Bank President Goolsbee (Austan Goolsbee) expressed the same view: "If you keep monetary policy restrictive for too long, you will encounter problems in employment within the Federal Reserve's mandate.

However, a series of recent data shows that the US job market has not collapsed as outsiders worry. But signs indicate that more and more people are joining the labor force and need more time than in the past to find a job.

San Francisco Federal Reserve Chairman Daly (Mary Daly), who has studied the labor market, said she has not seen any trend deterioration in the labor market. However, she warned that it is "extremely important" not to let the labor market fall into a recession and said that if this situation begins to occur, it will be necessary to take more active actions. The indicators closely followed by Daly show that the current cooling of the labor market is driven by a slowdown in recruitment, not an increase in layoffs.

Different from the past few meetings, the market's pricing for the interest rate cut in September is still not completely determined. Raymond James Chief Economist Aluman (Eugenio Aleman) emphasized that it is obvious that the Federal Reserve must start to take action, but the first interest rate cut will be 25 basis points, "the sky has not fallen, the floor has not shaken... A 50 basis point rate cut will send a wrong signal to the market that the economy is collapsing, and they do not want to do that."

Independent Advisory Alliance Chief Investment Officer Zachary (Chris Zaccarelli) said: "This is the moment we have been waiting for. According to the current indicators, the Federal Reserve does not seem to need to panic, starting from the upcoming interest rate cut." He added: "The most likely is that the Federal Reserve will first cut interest rates by 25 basis points on September 18, and then continue to wait for data to decide how much to cut in November and December."