The latest data show that US CPI and core CPI growth both slowed down in July: us CPI rose 8.5 per cent year on year in July, down 60 basis points from the previous 9.1 per cent.

As for the slowdown in the growth rate of inflation, Goldman Sachs Group analyst Rich Privorotsky said in a research report:

The Fed is in a tricky position.

There are two disadvantages in the macro distribution: the right tail risk and the left tail risk. The risk in the right tail is persistent excessive inflation in the medium term, and the risk in the left tail is that efforts to curb inflation will eventually lead to a recession. Privorotsky thinksThe latest CPI data reduces the likelihood of a right tail risk of runaway inflation, but increases the likelihood of a left tail risk.

Although inflation has stopped accelerating continuously, it is still at a high level, while the housing and services sectors are still growing at a disturbing rate, he said. The Fed needs to ensure that the financial conditions index (FCI) does not relax significantly, or they may cancel the big interest rate increases that have already been implemented.

Goldman Sachs Group proposed earlier.The lower-than-expected CPI will make the Fed face a very difficult situation, because as stocks and bonds rise at the same time, the Fed now has to actively tighten the financial environment again.Nomura agrees with this view.

Privorotsky said more upside risks to inflation would have a negative impact on further escalation of the Fed's hawkish stance and tightening of financial conditions. The unexpected decline in CPI reduces the likelihood of a right-tail risk in the macro economy, a "Goldilocks" outcome of a soft landing for the economy, the Fed and markets, rather than the basics of previous recessions.

But he points out that the problem isWith service and housing costs high, and the median CPI and revised average CPI of 6.3 per cent and 7.0 per cent respectively, widespread pressure from such a tight labour market and the risk of a wage-price spiral will make it unrealistic for inflation to fall explicitly to 2 per cent in the medium term.therefore,In the near term or even in the medium term, there must be little or no possibility for the Fed to turn to a dovish position.

At the same time, the Fed was annoyed that the dollar was hit hard, credit spreads narrowed, stock prices fell and commodity prices rose again after the market's risk interpretation of CPI.

According to Privorotsky, the biggest concern now may be the first quarter of 2023, when the path of falling inflation is not a smooth path of average decline over time, but a "structural" inflation that is more "shallow" than expected and stagnates in the range of 4 per cent, 5 per cent, unable to return to the 2 per cent target. Structural shortages of energy and labour have kept these inflation stable.

Privorotsky summed up thisThis should keep the Fed awake at night and make them inclined to tighten financial conditions for longer during this period.Many in the market have assumed that the Fed tightening cycle will end in the first quarter of 2023, but the risk is that it may be "mistakenly" interpreted by the market as a sign of the Fed's premature shift to dovish positions.The Fed may actually need to start tightening financial conditions again and risk a final "risk aversion" amid long-term policy uncertainty.