--- title: "US CPI Expected to Cool in July: Fed Rate Hike Expectations May Face a Second Shock" type: "News" locale: "en" url: "https://longbridge.com/en/news/295536490.md" description: "The US July CPI data will be released on August 12, with market expectations for the year-over-year rate to drop to 3.4%. Falling energy prices are dragging down overall inflation, while core services are expected to rebound mildly. Previous employment data showed an unexpected contraction in Non-Farm Employment and slower wage growth, confirming the disinflation trend. Weak price and employment data have undermined the basis for a Fed rate hike this year; the market expects the timing of a potential hike to be delayed until October, though completely ruling out a hike within the year remains difficult. Subsequent PCE and employment data will influence the extent of policy expectation revisions" datetime: "2026-08-11T12:24:01.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/295536490.md) - [en](https://longbridge.com/en/news/295536490.md) - [zh-HK](https://longbridge.com/zh-HK/news/295536490.md) --- # US CPI Expected to Cool in July: Fed Rate Hike Expectations May Face a Second Shock On the evening of August 12, the US Bureau of Labor Statistics (BLS) will release the July CPI data. Current market expectations are for overall CPI to rise 3.4% year-over-year (previous value: 3.5%) and 0.1% month-over-month (previous value: -0.4%); core CPI is expected to rise 2.5% year-over-year (previous value: 2.6%) and 0.2% month-over-month (previous value: 0.0%). Falling energy prices are expected to be the main factor dragging down overall CPI. Retail gasoline prices fell to nearly a four-month low in early July. However, after core service inflation unexpectedly dipped in June, it is expected to rebound mildly in July, with the month-over-month growth rate rising to around 0.3%, mainly driven by the recovery in airfare, communication services, and medical service prices. Core goods prices remained flat; although price increases in tech products may push up the prices of some IT goods, this effect was offset by deflationary trends in used car and clothing prices. Compared to the expected mild decline in July inflation, last week's US July employment data had a greater impact. US Non-Farm Employment unexpectedly contracted by 23,000 jobs in July (far below the market expectation of an 80,000 increase), and data for May and June were collectively revised down by 103,000 jobs. The average monthly job gain over the past three months was only about 20,000. Although the unemployment rate dipped slightly to 4.1% due to a decline in the labor force participation rate (to 61.4%), this illusory prosperity masks the underlying weakness in the job market. The most crucial dovish signal came from wages: average hourly earnings rose only 0.05% month-over-month, with the year-over-year growth rate falling to 3.15%, one of the lowest levels since the pandemic. The July CPI data is likely to remain below market expectations. Coupled with the fact that the labor market no longer provides sustained wage inflation pressure, weak employment data and slowing price growth will further confirm the US disinflation trend, significantly weakening the basis for a Fed rate hike this year. Nevertheless, even so, the market's revision of expectations for Fed policy may be limited to delaying the potential hike from September to October; it remains difficult to completely rule out one rate hike within the year. Before the FOMC meeting on September 16, July PCE data and August employment and CPI data will also be released. If subsequent data continue to be weak, the probability of fading rate hike expectations will increase significantly. ## **Housing, Goods, and Wages Jointly Form the Basis for Disinflation; Core Service Rebound More Likely a Short-Term Disturbance** The decline in July inflation stems first from energy prices. Although geopolitical factors have caused phased fluctuations in oil prices, the average US gasoline price in July has fallen from its highs, so the energy component is expected to continue dragging down overall CPI. Energy prices are expected to fall 1.18% month-over-month in July. Regarding core items, the peaking and decline of housing inflation is the absolute main driver of cooling inflation. Over the past two years, rent (with a weight of about 33.6% in CPI) has been an important driver of core inflation. As the lagged effects of slowing previous home prices and market rent growth continue to transmit, the decrease in new lease prices is gradually being reflected in statistics. The year-over-year growth rate of rent has fallen from a peak of over 8% to around 3.2%. Both rent for primary residences and Owners' Equivalent Rent (OER) have moved away from high levels, with a solid downward trend. Additionally, high mortgage rates continue to suppress real estate market activity. Existing home pending sales dropped significantly in June, indicating that transaction volumes in July will continue to be weak. Low demand combined with improved supply suggests that housing price pressures will ease further, and the risk of renewed price increases will not reappear. Furthermore, although some core services such as airfare, healthcare, and communications may rebound in July, this is more likely to represent a normalization after the abnormally low values in June, rather than a new round of broad-based inflation. Overall, core goods inflation lacks sustained upward momentum. Although AI demand has pushed up the prices of some electronic products like memory devices—with companies such as Apple, Lenovo, and HP previously raising prices for some computers and related products, potentially driving a short-term rise in the IT goods component—this has not yet formed broader price transmission. Moreover, used cars, clothing, and household items still face downward pressure. Used car prices are expected to fall 0.3% month-over-month, indicating that upstream price changes have not yet fully transmitted to end-consumer prices. Meanwhile, the July employment report further shows that the matching efficiency of the US labor market is returning to pre-pandemic levels. The quit rate has fallen to historic lows, the wage premium from job-hopping has been significantly compressed, and market slack has decreased markedly, explaining why wage growth has slowed significantly. The continued decline in wage growth (July average hourly earnings year-over-year growth fell to 3.15%) has alleviated labor cost pressures faced by enterprises, weakening the inflationary cost base of the service sector. With job demand clearly cooling, the ability of service providers to further pass costs on to consumers will also be limited. ## **September Rate Hike Expectations May Face a Second Shock** At present, there is significant divergence between the market and Fed officials regarding the Fed's next move: One camp believes the Fed needs to raise rates in September to demonstrate its determination to maintain price stability, especially as this could somewhat restore Waller's credibility damaged in the fight against inflation. The other camp believes that the pace of price increases is slowing, and maintaining the current policy direction is the correct choice for the Fed. July inflation data is expected to support the latter view. Core CPI year-over-year may fall to 2.4%, lower than the market expectation of 2.5%, and is expected to continue declining to 2.2%-2.3% in the next two months. Coupled with employment data confirming a cooling labor market, the policy basis for the Fed to continue raising rates in September will be significantly weakened. The core logic previously supporting the hawkish demands within the FOMC for a rate hike—stubborn inflation and an overheated labor market—may face double falsification at the data level. Immediately following, the global central bank symposium held in Jackson Hole, Wyoming, in late August will become the focus of attention. At that time, Waller's speech is likely to confirm progress in disinflation while expressing concern about downside risks in the labor market, but he is expected to maintain vague wording regarding the monetary policy path and framework adjustments. In addition, the US Bureau of Economic Analysis will update the PCE methodology in September, which is expected to reduce the inflation contribution from portfolio management fees and software components. This is expected to directly drive the August core PCE year-over-year rate below 3%. Key focus areas moving forward include changes in August CPI, core PCE, and the unemployment rate. If employment continues to deteriorate in August, the unemployment rate begins to rise significantly, and core CPI maintains its downward trend, the Fed's policy focus may gradually shift from "preventing inflation resurgence" to "preventing further deterioration in employment." Conversely, if core services continue to rebound and core CPI month-over-month rises back above 0.25%, the risk of a rate hike will still be difficult to completely rule out. Risk Warning and Disclaimer The market carries risks; investment requires caution. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial status, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. 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