US: Delayed Conclusion on Dual Mandate

■ The July US Consumer Price Index (CPI) showed limited pass-through from tariff hikes, but the upward trend in service prices intensified.  

■ Differences persist, and a decision on the "dual mandate" of monetary policy may be further postponed. 
 
    The July US Consumer Price Index (CPI), an important indicator for upcoming Federal Open Market Committee (FOMC) policy decisions, was released on the 12th. The core CPI, which reflects underlying price trends and excludes food and energy, increased by 3.1% year-over-year and 0.3% month-over-month. Both annual and monthly growth rates accelerated, and the month-over-month increase remained above the 2% target. Commodity prices, such as automobiles (up 1.2% year-over-year and 0.2% month-over-month), grew modestly, as concerns about tariff impacts on pass-through were limited. However, service prices, including transportation and health insurance, rose by 3.6% year-over-year and 0.4% month-over-month, remaining elevated and signaling a resumption of the upward trend in service inflation. 

 
    In related indicators, the Atlanta Fed's sticky-price core CPI (up 3.4% year-over-year and 4.8% month-over-month) marked its highest monthly annualized increase in six months. The Cleveland Fed's core CPI nowcast projects August's increase (up 3.05% year-over-year and 0.25% month-over-month as of August 13th) to be nearly identical to July's. Meanwhile, surveys from the University of Michigan and the New York Fed indicate that consumer inflation expectations over five years and the 10-year break-even inflation rate (BEI), as seen in bond markets, remain stable with no signs of accelerating medium- to long-term inflation. 

 
    Looking ahead at monetary policy, some senior Federal Reserve officials prefer to wait and observe the effects of factors like tariff policies, while others believe the Fed should act to address the slowdown in the labor market and economy, assuming tariff-driven price increases are only temporary. The former focuses on fulfilling the mandate of "price stability," while the latter prioritizes "maximum employment." The renewed rise in service inflation in the July CPI is insufficient to reconcile these differences, so a decision may be delayed further. It is generally believed that monetary policy effects take about six months to show, meaning delays could cause the Fed’s responses to lag behind economic developments. 

 
    The July employment data released on August 1st showed a slowdown in non-farm payroll growth, but the limited impact of the July CPI's tariff increase suggests little reason to delay action. Since the details of the "mutual tariff increase" were announced in April, the Fed has anticipated rate cuts in the second half of this year. Given the current near-equilibrium of labor supply and demand and the lag in policy transmission, the prevailing policy interest rate is already well above the neutral level, warranting a rate cut to ease the contractionary monetary policy.