On Wednesday (8:30 p.m. tonight), the U.S. Consumer Price Index (CPI) data will be released, which is crucial for predicting interest rate adjustments. If the CPI shows rising inflation, it may suppress the possibility of interest rate cuts; conversely, if inflation is mild, the probability of interest rate cuts increases.
At the same time, this article will also analyze the impact of CPI data on expectations for the Federal Reserve’s first interest rate cut on September 18, as well as CPI data’s interpretation of the relationship between inflation and interest rates!
CPI data and core CPI interpretation
The latest Consumer Price Index (CPI) value shows that the estimated inflation rate is expected to be 2.6%, which is the first time in recent months that it has been below 3%. Compared with the estimated value of 3.0% last month and the actual 2.9%, the estimated value this time has dropped by 0.3 percentage points. At the same time, the market is generally concerned about whether the final actual data will be consistent with the forecast, which will have an important impact on the Fed's interest rate decision.
At present, the market generally expects that the Fed will cut interest rates by 25 basis points at the meeting on September 18, which is almost a foregone conclusion, unless major systemic risks emerge in the next week. Otherwise, a 25 basis point rate cut is generally regarded as a more stable signal, meaning that the economic situation is relatively healthy and the policy adjustment is gradual and prudent.
In contrast, if the Fed chooses to cut interest rates by 50 basis points or more at one time, this may imply that there are greater risks in the underlying economic data, and may even indicate an increased risk of recession. Therefore, the upcoming CPI data and the Fed's interest rate decision are both the focus of close attention of market participants.
Next, we will focus on the core consumer price index (CPI) data - the core CPI, which is the data after excluding food and energy price fluctuations, is also an important indicator of inflation trends. The core CPI forecast for this month remains at 3.2%, the same as last month. Considering that the actual value last month was also 3.2%, the market generally expects that the actual value announced this time may be lower than this forecast.
Although core CPI remains an indispensable reference indicator for investors and decision makers in assessing economic conditions and formulating policies.
However, some people have questioned the accuracy of the core CPI data. Skeptics point out that the core CPI data often has a certain lag and the data may undergo multiple revisions after release. This has triggered discussions about its predictive value and reliability.
US real inflation index
Let's take a look at the data from Truflation's (Real Inflation Index for the United States) platform, a website that has been around since September 2021, during the outbreak and soaring inflation.
Many people believe that the data provided by Truflation can better reflect the inflation situation because, compared with the official CPI data, the advantage of Truflation is that its data is updated quickly, unlike the CPI and core CPI, which have a one-month lag.
In addition, CPI data may undergo multiple revisions, which may affect its accuracy in reflecting the state of the U.S. economy. Truflation uses daily updated data and applies AI algorithms to calculate a more realistic inflation rate. It is timely, efficient, and not easily compiled at will.
The general view among economic analysts is that the actual annual inflation rate in the United States is about 13-15%, which is much higher than the 5-6% annual inflation rate usually reported by the Federal Reserve. This can also be reflected in Truflation's data, especially from the end of 2021 to the end of 2022, when the inflation rate mostly remained above 10%.
However, it is worth noting that since the end of 2022, the inflation rate has continued to decline. So far, the inflation rate in the United States has dropped to 1.10%, which is not only lower than the 2.6% expected by the Federal Reserve, but the gap is quite significant. Therefore, there is reason to believe that an interest rate cut is imminent!
The relationship between inflation data and interest rates
The relationship between inflation data and interest rates is an important topic in economic analysis. Ideally, a healthy economy should keep inflation and interest rates in a relatively balanced state.
If the CPI shows an inflation rate of 2.6% and the Fed's interest rate remains at 5.25-5.50%, there is actually a positive interest rate differential of about 3%.
At the same time, the current actual inflation rate is only 1.10%, while the interest rate is still as high as 5.5%. This shows that the current interest rate may be too high and needs to be further lowered. However, whether the interest rate should be lowered significantly, such as a one-time 50 basis point cut, is also a question worth discussing.
According to the current economic data, interest rates are indeed relatively high, but the magnitude and timing of interest rate cuts need to be decided by the Federal Reserve based on broader economic indicators and market conditions. Because interest rate cut decisions should consider their long-term impact on the economy and whether they can promote economic growth and stability.
To put it in perspective, inflation was very high in 2022, reaching double digits according to Truflation. However, interest rates were only 5.5% at the time.
In this case, if your money is not invested somewhere that can provide a higher return, you are actually eroding the value of your assets because your purchasing power is decreasing.
This also means that although the funds you deposit in the bank have nominally increased, considering the impact of inflation, your funds have not actually maintained their original purchasing power, but have continued to shrink. Therefore, in order to protect assets from the erosion of inflation, it is particularly important to find investment channels that can exceed the inflation rate.
Conclusion:
Ideally, a healthy economy should keep interest rates close to the inflation rate to maintain economic stability. However, the current situation is that interest rates are significantly higher than inflation, which raises questions about the Fed's policy. Why doesn't the Fed lower interest rates quickly? The reason is that if interest rates are lowered too quickly, it will be difficult to control once inflation rises again.
Historical experience tells us that the United States faced serious inflation problems in the 1980s, when the Federal Reserve had to raise interest rates to nearly 20% to curb inflation. This was because the early interest rate cuts were too hasty, leading to increased inflation.
When inflation comes, it may have a huge impact on the investment market, including the stock, real estate and cryptocurrency markets.
Therefore, the Fed would rather maintain a high interest rate environment for a long time than cut interest rates too early or increase the rate cut, in order to avoid triggering a new round of inflation and potential shocks to the market. This cautious attitude may be to ensure the long-term stability of the economy and prevent the recurrence of past historical mistakes.