As the U.S. economy and labor market show signs of weakness, the latest price report will attract great attention from the market, as it may affect the timing of the final policy shift. The Fed reiterated in its July resolution statement that it would consider taking action only when it is more confident that inflation is moving sustainably toward its 2% target. Therefore, the data may add more weight to the potential September window and will also become the fuse for the market downturn.

Since March, prices in the United States have resumed their downward trend. The June CPI report is one of the most encouraging reports the Fed has received since it began this round of rate hikes. The CPI fell 0.1% month-on-month, the first decline since May 2020, as gasoline costs fell and rents slowed, firmly putting inflation back on track. Excluding food and energy, the core CPI rose slightly by 0.1% in June, and the overall CPI rebounded by 0.2% in July, which would stabilize the 12-month change at a more than three-year low of 3.0%. Although gasoline prices rose 1% this month, grocery store prices may have remained almost unchanged amid more stable input prices and increased promotional activities. The agency predicts that the core CPI will increase modestly by 0.2% month-on-month in July, mainly due to a rebound in some volatile "super core" components, and the core inflation rate will fall slightly to 3.2% year-on-year. Looking at the sub-indicators, with core commodity inflation already below pre-pandemic levels, more substantial cooling of the service industry is needed to continue to push core inflation down. Housing costs rose modestly by 0.2% after rising 0.4% in May, but the sustainability of this increase remains to be seen.

Wells Fargo said in a report that the monthly growth in July will be driven by the "super core" after a sharp decline in the volatile travel services category and below-trend growth in medical services in June. But the monthly estimate of core inflation of 0.2% will still be significantly lower than the average increase of 0.40% in the first six months of this year. Looking ahead, inflation is expected to continue to subside according to trend in the coming quarters, but will remain above the Fed's target. With unit labor costs below 2%, it highlights that labor market conditions no longer pose a threat to the Fed's inflation target. Although the cooling rate of service industry inflation has been slower than that of goods inflation, it should benefit from the slowdown in the growth of physical input costs.

There are growing signs that the labor market is losing momentum and economic activity is cooling as the Federal Reserve raises interest rates aggressively in 2022 and 2023. The unemployment rate rose to 4.3% in July from 4.0% in May. Since June, the number of people applying for unemployment benefits this year has hovered at a high level for the year. The New York Fed's updated second-quarter household debt and credit report showed that even as credit continues to increase, the pace of debt growth has slowed in recent quarters, suggesting that consumers may be feeling the pinch of rising interest rates.

Although there is no sign that the Fed needs to rush to cut interest rates, the basis for a September rate cut is slowly forming as the Fed's policy focus is gradually shifting from prices to the economy. It is expected that the fund rate may fall to around 3.5% by next summer. With weak business surveys, rapid cooling of hiring, inflation close to 2%, and unemployment exceeding expectations, if the CPI in July is significantly higher or lower than expected, it may trigger another round of market confusion.