Author: Fan Zhijing

　　On Wednesday, the U.S. Commerce Department will release the U.S. consumer price index (CPI) for July.

After the June data unexpectedly rebounded to a new high since 1981, due to factors such as the recent decline in energy and other commodity prices, the market generally expects that inflationary pressures will ease this month.

　　For the Fed, how to achieve a soft landing of the economy and maintain job market stability while suppressing prices remains the most practical challenge ahead.

　　Multiple factors ease price rises

　　The pullback in commodities and the easing of supply chain bottlenecks are the key factors affecting inflation expectations.

Consumer inflation expectations fell to 6.2 percent in July from a record 6.8 percent in one-year terms, 3.2 percent in July from 3.6 percent in three-year terms, and 3.2 percent in five-year terms in July, according to the New York Fed's monthly survey released on Monday. 2.8% to 2.3%.

　　As the biggest driver of this round of inflation in the United States, the sharp fall in energy prices since July has played a key role.

International oil prices have fallen to near six-month lows due to concerns about a global economic recession.

At present, the average domestic gasoline price has fallen to $4.18 from an all-time high of more than $5 set in June.

The price of agricultural products has also eased with the restart of Ukraine's grain shipments. The first financial reporter noticed that in the past month, U.S. wheat futures have fallen by more than 10%, and corn and soybeans have fallen by nearly 3%.

　　Meanwhile, the New York Fed’s Global Supply Problems Index report released last week said global supply chain stress in July fell to the lowest level since January 2021 as port congestion and other obstacles eased, and the index is now better than 12 last year. The month's record high is down more than 50%, but it is still well above pre-pandemic levels.

Supply chain issues have emerged as a key issue in the global recovery from the pandemic and a challenge for the Federal Reserve and other major central banks in their efforts to curb inflation.

　　The latest Purchasing Managers' Index (PMI) also showed the impact of improving supply and demand on prices.

Timothy Fiore, chairman of the Institute for Supply Management's (ISM) Manufacturing Business Survey Committee, said data from the manufacturing sector showed that after strong growth over the past two years, a pullback in the new orders index eased price pressures, with manufacturers priced The index fell to its lowest level since August 2020.

Standard & Poor's global chief business economist Williamson (ChrisWilliamson) pointed out that the price increase of raw materials and finished products continued to slow in July, which further indicates that inflation has peaked.

　　Inflation Nowcasting, a Cleveland inflation forecasting tool, shows that indicators including CPI, core CPI and monthly personal consumption expenditures (PCE) monthly rate are expected to fall back in July, with CPI monthly rate dropping to 0.27%, a year-on-year growth rate will fall back to 8.8%.

However, it should be noted that the CPI growth rate in August is also expected to be 8.8%, indicating that inflation may be difficult to fall back quickly.

　　Bob Schwartz, a senior economist at Oxford Economics, said in an interview with a reporter from China Business News that the current round of inflation cooling is expected to be slow, and the Fed will remain highly vigilant.

He believes that, in addition to commodity prices, it is also necessary to pay attention to the signal of inflation spreading to the service industry.

This is because the price of services (hotels, entertainment, air tickets, etc.) tends to be easy to rise and hard to fall, which will be a risk that future inflation will become entrenched.

　　Consumer spending faces test

　　Data released last month showed that the U.S. gross domestic product (GDP) continued to shrink in the second quarter from a month earlier, the first time since the 2008 financial crisis that it fell into a technical recession.

Affected by price pressures, consumer spending, the main engine of the economy, slowed to 1% year-on-year, but this was the smallest increase since the recovery from the epidemic.

Schwartz told Yicai that consumers have become cautious while maintaining spending as the U.S. economy shows signs of slowing.

There is a real risk that excess savings may be less useful than previously expected to support consumer spending, with future savings rates having a significant impact on growth prospects.

　　US retail giant Wal-Mart recently issued a performance warning, saying that inflation is having a huge impact on consumer spending, and the department store industry will face greater pressure in the second half of the year.

"Compared to last year's stimulus checks, people are now paying for food inflation. Some customers are already under pressure," Walmart Chief Executive Doug McMillon said in a statement.

Another retail giant, Target, announced in early June that it would take measures, including price cuts, to reduce excess inventory.

Target CEO Brian Cornell said at the time that the company had expected a slowdown in demand after the stimulus ended, but was caught off guard by the magnitude of the cooling.

　　Surveys including the Conference Board and the University of Michigan's consumer confidence index remained low.

"Inflation concerns continue to weigh on consumers." Lynn Franco, senior director of economic indicators at the Conference Board, pointed out that purchase intentions for durable goods such as cars, houses and major appliances all retreated in July.

"Looking ahead for the next six months, inflation and rate hikes are likely to continue to pose strong headwinds to consumer spending and economic growth."

　　Loan consumption has become a backup option.

Data released by the Federal Reserve on the 5th showed that U.S. consumer loans rebounded sharply in June, increasing by $40.154 billion, the second-highest monthly increase in history.

Changes in credit are usually an important indicator of economic conditions, and last year's U.S. credit recovery mainly reflected an improving economy, rising wages and a strong labor market, allowing consumers to borrow more money to buy new cars, take vacations, and more.

　　However, high inflation and rising interest rates complicate the situation.

The purchasing power of U.S. household incomes is declining, and higher interest rates mean people have to pay higher interest on credit cards, auto loans and other large loans.

If the slowdown persists, credit use could decline and consumers typically spend less, further exacerbating economic risks.

　　Schwartz believes that from the perspective of credit data, many people choose to borrow to support consumption in the face of inflationary pressure.

Despite other signs of an economic slowdown, the July jobs report was good, showing that job growth was broad-based and accelerating, and wage growth was also healthy, driven by strong business demand.

From the current situation, the sentiment expressed by the consumer confidence index has not led to a reduction in daily spending, but the impact of inflation on consumption choices has begun to emerge, which requires vigilance.

　　How the Fed chooses the path to raise interest rates

　　In response to inflationary pressures, the Federal Reserve has raised interest rates by 225 basis points since March, the fastest policy tightening since the 1980s.

　　Several Fed officials recently reiterated their hawkish policy stance.

San Francisco Fed President Mary Daly said the Fed's fight against inflation is "far from over" and will remain firmly committed to maintaining price stability.

Chicago Fed President Charles Evans (Charles Evans) said that the rate of interest rate hike depends on whether inflation has improved. rate faster and then have to cut rates.

　　The latest non-farm payrolls data boosted expectations for the Federal Reserve to raise interest rates. The yield on the 2-year U.S. Treasury bond, which is closely linked to short-term interest rates, rose by more than 30 basis points last week, the largest weekly increase in nearly 10 years.

At the same time, the potential risk to the economy from higher interest rates has pushed the 2/10-year U.S. Treasury yield inversion to its highest level since 2000.

　　"The Fed will continue to work to contain inflation without tipping the economy into recession," said Dante DeAntonio, economist at Moody's Analytics. "Wage and price growth data won't do them any good because Even though the broader economy has weakened, upside pressure is evident."

　　Wells Fargo believes the economy appears to be decelerating but not collapsing for now, in line with the Fed's goal of cooling inflation.

At the September meeting, interest rates will be raised by at least 50 basis points, and a further 75 basis points may be expected if inflation falls short of expectations in the next two CPI reports.

The bank believes that while inflation is expected to start to moderate in the third quarter, it will take a long time to fully return to sustainable levels, so the road ahead for the economy looks bumpy.

　　Schwartz told Yicai that it is difficult for the Federal Reserve to "relax" on the price issue until a clear inflection point occurs and falls back, and that inflation peaking does not mean the problem is solved.

The Fed's goal is to see a real signal that inflation is continuing to move towards 2%.

On the other hand, there have been signs of volatility in the labor market recently. Regardless of whether the interest rate hike in September is 50 basis points or 75 basis points, as interest rates continue to approach the neutral level, economic pressure and changes in consumer demand will make the Federal Reserve consider starting from the fourth quarter. Cut the rate hike to 25 basis points and may end the rate hike cycle in the first half of next year.