Will there be a “dovish surprise” in tomorrow’s US CPI? Goldman Sachs says inflation may be lower than widespread expectations, while HSBC bets on “moderate” data.

The U.S. July inflation data will be released on Wednesday. Goldman Sachs expects the increase in core CPI to be slightly below market consensus, and the decline in energy prices will further depress the overall inflation reading. If the data comes in weaker as expected, market expectations for Federal Reserve rate hikes may cool further.

According to the latest Goldman Sachs report, the bank expects core CPI to rise 0.19% month-on-month in July, lower than the market consensus of 0.2%, corresponding to a year-on-year increase of 2.47%, also below the market expectation of 2.5%. For overall CPI, dragged down by falling retail gasoline prices, energy prices are expected to decline 2.0% month-on-month, pushing the overall CPI to rise only 0.05% month-on-month, lower than the market consensus of 0.1%. The year-on-year increase is expected to be 3.35%, down from 3.53% in June.

HSBC multi-asset strategist Duncan Toms also pointed out that the June inflation data has already shown an "unexpected dovish trend," with his nowcast model indicating that July data could remain mild. He stated that if the data is indeed weaker as expected, it will serve as a catalyst for cooling market expectations regarding Federal Reserve rate hikes, and at that time, the U.S. Treasury yield curve may experience a bull steepening trend. This scenario will create a 'strong Goldilocks environment in which almost all asset classes will see broad-based gains.'

The Goldman Sachs report focuses on the expected performance of three key components.

The auto sector is showing a mixed pattern. Supported by signals from used car auction prices, used car prices are expected to rise 0.5% month-on-month; new car prices are expected to be basically flat due to dealer promotions, with a 0.1% increase; auto insurance prices are expected to fall 0.5%, reflecting a decline in premiums observed in the bank’s online dataset.

The housing component is expected to remain moderate. Goldman Sachs projects Owners’ Equivalent Rent (OER) to rise 0.23% month-on-month, and the primary rent component to rise by 0.16%, both reflecting a continued cooling of underlying housing inflation. The housing component accounts for about one-third of core CPI, and its performance has an important impact on the overall reading.

Travel services remain mixed as well. Boosted by the rebound in oil prices in July, Goldman Sachs expects airline ticket prices to rise 2.0% month-on-month; hotel prices are expected to decline by 1.0%, as the boost to accommodation demand from the World Cup continues to fade—the effect had already appeared in last month’s CPI data, as the relevant prices are measured at the reservation point.

Goldman Sachs points out that even though the core CPI reading remains soft, the corresponding July core PCE is expected to rise 0.26% month-on-month, significantly higher than the core CPI increase, mainly because the portfolio management component will rise sharply—this lagged component reflects second-quarter equity market gains.

It is noteworthy that the core PCE methodology will be revised at the end of September. Goldman Sachs explains that initially, the new method will use wage data, which has a looser correlation to stock prices, to estimate the portfolio management component. At that time, the initial July core PCE could be revised down to 0.21%. Once third-quarter service industry survey data becomes available in December, the portfolio management component will again be adjusted based on actual fee data, at which point the July inflation reading may be revised upward. This methodology switch will bring periodical volatility to the core PCE readings, and investors should be aware of this.

Looking ahead to the coming months, Goldman Sachs expects core CPI to increase about 0.2% monthly, mainly supported by continued cooling in the housing component, the narrowing impact of tariff-driven price increases, and the fading effect of earlier jet fuel price rises on airfares.

However, Goldman Sachs also points to upside risks. The report notes that if supply disruptions in the oil market persist longer than expected, driving oil prices higher, the inflation trajectory could deviate significantly from baseline forecasts. As seen in the airline ticket price component this time, the transmission of oil price fluctuations to CPI is already quite direct—a risk factor that should not be overlooked.