Will CPI fail to shake the interest rate cut in September? Has the Fed made up its mind?

According to analysts at Evercore ISI, the Federal Reserve has shifted its focus from inflation data to labor data, fundamentally changing its monetary policy stance.

The investment firm stated in a statement on Monday that the Fed will now prioritize the labor market, with the upcoming release of the U.S. Consumer Price Index (CPI) playing a secondary role in decision-making.

Evercore ISI explained that while the Fed still pays attention to inflation, especially the July CPI, it has "a lower reliance on data points and is more forward-looking."

Strategists emphasized that even if inflation is higher than expected, the Fed may still focus on preventing deterioration in the labor market. In other words, the likelihood of a rate cut in September is high.

The statement noted: "For both the Fed and the market, employment data is now more important than inflation data."

According to them, this shift reflects a broader Fed strategy of mitigating downside risks to employment rather than overreacting to short-term inflation fluctuations.

Analysts pointed out that the Fed has adopted a "two-way risk management" approach, acknowledging progress in inflation and reducing the likelihood of labor market pressures driving inflation higher.

Upcoming inflation data may impact the Fed's policy flexibility, but Evercore ISI believes that "soft data showing a 0.2% increase in core CPI on a month-on-month basis will be a clear signal of risk appetite," giving the Fed greater room to proactively cut rates.

While the 0.2% month-on-month growth rate has accelerated compared to June, core CPI on a year-on-year basis is expected to continue growing at its slowest pace since early 2021, projected to decrease from 3.3% in June to 3.2%. Meanwhile, overall CPI is expected to increase by 0.2% on a month-on-month basis and 3% on a year-on-year basis.

If the CPI report meets expectations, it would indicate that inflation is still on a downward trend. Economists generally believe that after the unexpected low data in June, inflation will rebound slightly. They point out that this reversal is mainly due to the so-called super core inflation, which excludes housing from core services, a key category of concern for policymakers. Some forecasters also note that rising transportation costs pose upside risks to commodity prices.

However, the slowdown in housing costs since June should continue. This category accounts for about one-third of the overall CPI and is an important determinant of broader inflation trends. The Producer Price Index (PPI) released the day before the CPI will also be closely watched as categories within it affect the Fed's preferred inflation gauge, the Personal Consumption Expenditures Price Index (PCE)