The U.S. consumer price index (CPI) for July is about to be released, with market expectations that overall inflation may slightly cool down, but price increases are still higher than the Federal Reserve’s (Fed) target. The situation in the Middle East has also pushed up energy prices, adding more uncertainty to the inflation outlook.
Boston Fed President Susan Collins stated that if future data shows persistent high inflation, she does not rule out supporting a rate hike as early as September. The financial markets are currently reevaluating the Fed’s next policy direction.
A Reuters survey indicates that the U.S. July CPI is expected to rise by a slight 0.1% compared to a significant 0.4% decrease in June (the largest monthly drop in six years), reversing to a mild increase. The year-on-year inflation rate for July is expected to slow down from June’s 3.5% to 3.4%.
Excluding the more volatile food and energy prices, the core CPI is expected to increase by 0.2% monthly and 2.5% annually. While these data reflect some easing of inflation pressures, overall price increases still exceed the Fed’s 2% policy target.
The moderation in overall price increases in July is mainly attributed to the decline in gasoline prices. According to the U.S. Energy Information Administration (EIA), the average gasoline price in July was $4.064 per gallon, lower than June’s $4.184 and significantly down from May’s $4.609.
However, the recent geopolitical tensions have once again raised oil prices, and the latest round of energy cost increases has not fully reflected in the July CPI, indicating that there are still variables in the future inflation trend.
Collins, in an interview with the Financial Times, expressed readiness to support a rate hike as early as September if economic data shows it necessary. She said, “I do think that the economic situation in the coming months may require a tighter policy, and in that circumstance, I would be ready to hike rates.”
Although Collins is not a voting member of the Federal Open Market Committee (FOMC) currently, her comments reflect the Fed’s internal vigilance against inflation risks.
She supported keeping rates unchanged in July, believing that the current policy rate is “moderately restrictive” and should help gradually cool off inflation. However, if price pressures do not subside as expected, further tightening of policy could still be an option.
The pressure of high prices on households is also a focus for Fed officials. Collins mentioned that almost every conversation she has with businesses involves issues related to prices.
She also stated, “I am increasingly hearing from low- and middle-income families about the challenges they face in maintaining a balance between income and expenses. Energy prices really bring about significant challenges, especially in our region.”
The New England region’s higher reliance on heating oil during the winter and the use of oil as a backup fuel for power generation make it more sensitive to fluctuations in crude oil prices. The uncertainty in the global energy market due to the Iran conflict, disruptions in the Strait of Hormuz oil transport, as well as factors like tariffs and infrastructure spending on artificial intelligence (AI), collectively contribute to price pressures.
Another challenge that the Fed faces is a weakening labor market.
The U.S. July employment report showed a decrease of 23,000 jobs; the average increase in positions over the past three months has been only about 20,000 per month, significantly lower than the average of 73,000 in the first quarter of the year. The weak employment data briefly lowered market expectations of a near-term rate hike.
Collins warned against relying solely on monthly data to determine the direction of the labor market. She pointed out that private sector employment continues to grow positively, spread across different industries, and the unemployment rate remains relatively stable. She believes that the overall labor market data currently show considerable divergence, in an unusual balance, but at the present stage, the inflation risks remain prominent.
“There are many things to observe, but inflation is still too high,” she said.
Market views on the September FOMC meeting are gradually becoming more divided. Aside from Collins, several officials have indicated that if inflation does not sufficiently cool down, they would not rule out supporting a rate hike.
The currency market currently reflects a 50% probability of a 0.25 percentage point rate hike in September.
Ahead of the CPI release, geopolitical risks have also driven up safe-haven and energy assets. U.S. crude oil has risen above $83 per barrel, Brent crude is approaching $90, and spot gold has climbed to around $4,400 per ounce. Market participants are closely monitoring the CPI data to assess whether the Fed needs to further tighten policy while inflation remains above target.
Therefore, even if the July CPI shows a slight cooling of inflation, it may not be enough to eliminate the possibility of a rate hike in September.
The upcoming energy prices, core inflation, and employment data will collectively influence the Fed’s evaluation of price stability and labor market risks, determining whether further policy tightening is needed.