In the month since the June Consumer Price Index (CPI) report was released, global markets have experienced significant volatility. The Cboe Volatility Index (VIX) reached its highest levels since the pandemic.

One of the main reasons for this volatility was the U.S. labour market data indicating a cooling beyond expectations. This reversed expectations of a soft landing and sparked concerns that the U.S. economy could collapse.

Market participants are almost sure that the Federal Reserve will shift its focus to labour market risks and will not continue its high-interest rate policy. All three remaining monetary policy meetings for the year are expected to result in rate cuts, with market forecasts ranging from 75 to 125 basis points.

However, as the market's focus shifted to labour market developments, some Fed officials issued cautious statements highlighting ongoing inflation risks. Although the CPI data showed continued easing of price pressures, inflation remains at 3%, well above the Fed's target.

Consequently, today's data will be crucial in determining whether the Fed gains confidence that inflation is moving toward its target rate. A data release that deviates from expectations could change rate-cut forecasts and significantly increase market volatility.

Will July CPI Data Influence the Fed's Decision on a September Rate Cut?

Market participants expect the headline CPI in July to show a modest increase every month but remain steady annually. Following the 0.1% monthly decline in June, price pressures are expected to increase by 0.2% (MoM) in July, while the yearly increase is anticipated to remain steady at 3%. Meanwhile, core inflation, which excludes food and energy prices, is expected to continue easing annually, dropping from 3.3% to 3.2% while increasing by 0.2% monthly.

Even if the monthly data shows a slight increase, market participants are betting that the CPI report will give the Fed confidence to begin rate cuts in September as long as the annual data does not show a significant rise.

Fed Survey Reveals U.S. Households Expect Lower Medium-Term Inflation

Consumer expectations are another important variable that the Fed considers when making policy decisions.

A consumer expectations survey released by the New York Fed on Monday revealed that U.S. households expect lower inflation in the medium term. Three-year inflation expectations dropped by 0.6 points to 2.3%, the lowest medium-term inflation expectation since the survey began 2013.

Meanwhile, one- and five-year inflation expectations remained unchanged. U.S. households expect 3% inflation over the next 12 months and 2.8% over the next five years.

The survey also highlighted expectations regarding the labour market. U.S. households are not overly concerned about losing their jobs or rising unemployment in the next year.

The perceived likelihood of losing their job is 14.3%, while the probability of the unemployment rate being higher a year from now is reported at 36.6%. Moreover, households estimate a 52.5% chance of finding a new job if they lose their current one.

On the other hand, expectations for earnings growth over the next year have dropped by 0.3 points to 2.7%.

High earning growth has recently been a significant factor in the persistence of inflation. The latest data on average hourly earnings showed a 2-point drop, bringing the rate down to 3.6%. The continued slowdown in household earning growth will likely decrease consumer spending, which would help ease price pressures.