On Thursday, official data showed that the US Consumer Price Index rose by 3.2 percent year-on-year in July, slightly lower than the expected 3.3 percent. Excluding the more volatile food and energy components, the core CPI in July increased by 4.7 percent. In response to this, the market widely believes that the Federal Reserve might halt its rate hikes in September. The increase in prices was led almost exclusively by housing. The housing component of the CPI tracks the change in the rental value of different housing units or the equivalent rent if owner-occuppied, and it takes roughly 12 months for changes in market rents to become fully incorporated into the CPI.

Following the outbreak of the pandemic, the boom in the US real estate market drove rents up rapidly. With the Federal Reserve's interest rate hikes, the growth momentum slowed significantly in the latter half of the previous year. This slowdown is now beginning to manifest in the CPI statistics, one year later.

A letter this week from the Los Angeles Federal Reserve revealed that all private-sector house price and rent indicators are currently decreasing, and it is expected that they will continue to decline in the future. The contribution to the year-on-year CPI indicator may drop from the previous high single digits to negative values by the middle of next year, becoming the most severe contraction since the financial crisis in 2008.

The crisis in small and medium-sized banks and the potential credit tightening could also be a factor in the Federal Reserve's considerations for its next policy steps, which could further encourage the Fed to end its rate hikes.

Even before the release of the July CPI data, some officials within the Federal Reserve had already indicated that they might halt the rate hikes. Of course, there are differing views within the Fed as well. The final decision will still depend on future economic data, and at least the data for August, which will be available before the September meeting, needs to be observed.

Looking at the overall situation, it's highly likely that the Fed will keep interest rates unchanged. They are likely to continue observing the follow-up effects of the previous rate hikes, allowing monetary policy and market mechanisms to fully play their roles.

21ST CENTURY BUSINESS HERALD