US July CPI Release Imminent! Goldman Sachs Chief Economist: Inflation to Show Moderate Performance, Labor Market Cools, Rate Hikes Unnecessary

The US July Consumer Price Index (CPI) will be released at 8:30 PM Taiwan time today (12th), a data point viewed by markets as a 'watershed moment' for the Federal Reserve's (Fed) upcoming interest rate decision. Following the unexpected decline of 23,000 jobs in July's non-farm payroll, worse than expected, the inflation data will determine whether Fed Chair Powell holds steady or restarts rate hikes.

Goldman Sachs' Chief Economist and Head of Global Investment Research, Jan Hatzius, said in an interview Tuesday (11th) that he expects July CPI to increase only 0.05% month-on-month, with core CPI rising approximately 0.19%, slightly below or in line with market consensus of 0.1% and core 0.2%. Year-on-year rates are projected at around 3.35% and 2.47% respectively, continuing June's deceleration trend, primarily driven by falling energy prices, while rent and wage inflation continue to cool naturally.

Hatzius attributes the first five months of higher-than-expected inflation to three temporary factors: monthly tariff transmission, oil price increases pushing up the overall index, and service price hikes related to the World Cup.

According to Hatzius's estimates, the year-over-year effect of tariffs still contributes about 0.7 percentage points to the core Personal Consumption Expenditures (PCE) data. Core PCE currently stands at a 3.3% annual rate, but monthly transmission has largely ended, and this drag is expected to trend toward zero over the next 6 to 12 months.

On the employment front, Goldman has significantly revised down its monthly employment trend estimate from 75,000 to about 5,000. This figure, derived from a weighted average of three months of payroll data and nine months of household surveys, highlights how the labor market is rapidly cooling beneath the surface volatility.

Regarding policy interpretation, Hatzius clearly stated that Goldman predicts no further rate hikes this year, as natural downward forces have made additional tightening unnecessary. Even if Powell hints at broadening the inflation perspective and not fully anchoring to core PCE, Hatzius expects core PCE to remain the market's primary focus beyond 2027 and supports the 2% target as the 'correct number'.

Bank of America and HSBC also bet that softer data will lower the odds of a Fed rate hike next month. According to CME's FedWatch data, the market sees a 50-50 chance of tightening in September.

Additionally, Hatzius gave the US economy a 'quite good' assessment, pointing out that GDP will grow 2% to 2.5% over the next 1 to 2 years with low and stable unemployment. However, inflation remains a stubborn issue stemming from excessive price gains over the past five years, and the path to better inflation conditions will take longer than anticipated. If tonight's CPI comes in as mildly expected, it will ease pressure for a September pause on rate hikes. But if it rebounds stronger than expected, Powell's 'open framework' will face a credibility test.