Countdown to CPI: Which data is key for the gold and USD index trends?

With less than 1 hour left until the CPI data is released, traders are all on high alert.

According to Wall Street estimates, following a -0.1% reading last month, the month-on-month CPI for July is expected to rise to 0.2%, while the year-on-year figure is expected to remain at 3%; excluding the volatile energy and food prices, the core CPI is expected to increase from 0.1% in June to 0.2% month-on-month, but is expected to decrease from 3.3% last month to 3.2% year-on-year.

Overall, it is expected that the overall CPI for July will see a slight increase from the previous value, mainly due to the rise in energy prices such as natural gas. However, it is anticipated that this will not change the broader trend of falling inflation. The core CPI for July is also expected to increase slightly, but the year-on-year figure is expected to decline, remaining overall moderate, reflecting a continued trend of declining inflation.

Analysts believe that the US dollar will face significant volatility, as any surprises in this inflation report could significantly impact the market's pricing of the Fed's rate cut expectations for September. Market expectations for a 50 basis point rate cut by the Fed in September will be tested when the CPI data is released.

Market participants are particularly focused on the month-on-month performance of the core CPI. If the core CPI, unaffected by base effects and distorted by volatile item prices, rises by 0.3% or more month-on-month, investors may lean towards expecting a 25 basis point rate cut by the Fed in September. Market positioning suggests that such data could trigger a rebound in US bond yields and help strengthen the US dollar. Conversely, if the month-on-month increase in core CPI is lower than expected, market participants may still hope for a 50 basis point rate cut in September. In this case, the US dollar may face new selling pressure.

Weaker-than-expected CPI inflation could also support gold prices, as gold becomes a more attractive investment compared to yield assets. Meanwhile, amidst escalating geopolitical tensions, gold's safe-haven status also supports its attractiveness. Recent developments in the Middle East and ongoing conflicts involving Russia and Ukraine have increased demand for precious metals.

Goldman Sachs' Expectations Slightly Below Market Consensus

Goldman Sachs expects the month-on-month core CPI for July to come in at 0.16%, slightly below the market consensus, with a year-on-year figure of 3.2%. In terms of overall inflation, Goldman Sachs expects a month-on-month increase of 0.17% for July, with a year-on-year figure of 2.93%, both below market consensus. As Goldman Sachs predicts a 0.15% increase in food prices and a 0.4% increase in energy prices, the forecast excludes core service inflation such as rent and owner's equivalent rent, which is expected to rise by 0.15%. Chart 1 provides a summary of the components forecasted by Goldman Sachs.

Goldman Sachs emphasizes that this month's report should focus on the following four key sub-items.

1. Automobile Prices

Goldman Sachs expects that in July, the prices of used cars in the United States will further decrease (-1.5%), while new car prices will also slightly drop (-0.1%). The auction prices of used cars have already dropped by 26% from their peak, while the used car sub-item in the CPI has only decreased by 18%. This indicates that there is still room for decline in the used car inflation sub-item in the CPI. Goldman Sachs predicts that new car prices will slightly decrease as promotional incentives have rebounded after the end of dealer software system interruptions in June.

2. Airfare Prices

Goldman Sachs expects that airfare prices in the United States will decrease by 2.5% in July. Although the online airfare price index of Goldman Sachs stock analysts remained largely unchanged last month, Goldman Sachs suspects that seasonal factors may drag down the data for July.

Seasonal factors in July may drag down airfare prices

3. Housing Inflation

After a significant decrease last month, Goldman Sachs expects Owner's Equivalent Rent (OER) to moderately rise again (+0.29%), with primary rents partially rebounding (+0.33%), reflecting the surge in OER in January and the decline in rents. Looking ahead, Goldman Sachs believes that the growth of single-family home rents will be stronger, potentially leading to a better performance of OER compared to rents in the CPI.

Goldman Sachs predicts that the month-on-month overall housing inflation will be maintained at 0.25%-0.30% until December 2024.

OER and rent inflation will rebound slightly

4. Car Insurance

Goldman Sachs expects car insurance prices to rise, but the increase will not be as intense as earlier this year. The bank forecasts a 0.7% increase in car insurance premiums, while the average increase so far in 2024 is 1.2%. Higher car prices, maintenance costs, medical and litigation costs have forced insurance companies to raise prices, but the transmission of premium increases to consumers is slow, partly because insurance companies need to negotiate price increases with state regulatory agencies.

The weight of car insurance in the PCE index is much smaller, and the data sources used are different, so Goldman Sachs does not expect these changes to have a significant impact on PCE inflation. Goldman Sachs predicts that core PCE will increase by 0.17% month-on-month in July.

Looking ahead, Goldman Sachs expects core CPI inflation to be around 0.2% month-on-month for the remainder of the year. The bank believes that the rebalancing of the automotive, housing rental, and labor markets in 2024 will further alleviate inflationary pressures, but expects that the catch-up inflation in medical and car insurance will partially offset these effects. Goldman Sachs forecasts that by December 2024, core CPI year-on-year inflation will be 2.9%, and core PCE year-on-year inflation will be 2.6%