Besides the main figures on headline inflation and core inflation, it will be important to drill down into the decimal points and the detailed breakdown of the US CPI report. The thing that market players will be looking out for is whether or not we will see a more pronounced impact from tariffs on prices.
So, will this be the month that happens?
Goldman Sachs argues that it won’t be as straightforward and the firm is noting that we might just see more impact from China tariffs rather than reciprocal tariffs as a whole. But in looking to the months ahead, we should start to see more impact now that trade discussions look to be more settled after the 1 August deadline.
“Our estimates imply that foreign exporters had
absorbed 14% of the cost of all tariffs implemented so far through June, but that their share will rise to 25% if the
more recent tariffs follow the same pattern as the earliest tariffs on China. We find that US consumers had absorbed 22% of tariff costs through June but that their share will rise to 67% if
the recent tariffs follow the same pattern as the earliest ones. This implies that US businesses have absorbed
more than half of the tariff costs so far but that their share will fall to less than 10%.
Our analysis implies that tariff effects have boosted the core PCE price level by 0.20% so far. We expect
another 0.16% impact in July, followed by an additional 0.5% from August through December. So, keep a close eye on that as well.
In any case, the impact of the inflation numbers today is mostly going to be on the Fed outlook. As things stand, traders are accepting that a September rate cut seems to be a given at this point. As such, one can reasonably expect markets to hold the status quo if the inflation numbers come in more or less close to expectations. And I would argue, even if on a slight beat of the estimates. Although, that might complicate the discussion for October and/or December but we’ll cross that bridge once we get to it.
As for a softer set of readings, I think it wouldn’t be too much of a stretch to think that markets might get carried away into debating between a 25 bps and a 50 bps for next month. That until Fed policymakers feel like they might have to push back on the latter that is
