Federal Reserve’s Inflation Battle: CPI Report Holds Clues

The Consumer Price Index Report Anticipation

Today, all eyes are trained on the impending release of the Consumer Price Index (CPI) report. Traders are looking to glean more insights about the Federal Reserve’s next course of action, in particular, whether they have concluded their tightening cycle. For the past few months, the headline inflation rate has exhibited a steady decrease, hovering around the 2.5% mark. This trend has strengthened projections of a “soft landing”. Yet, the persistently high core figure makes Federal Reserve officials reluctant to claim triumph over inflation just yet.

Market Expectations for August

The anticipated figures for August suggest that headline inflation could increase by 3.6% Y/Y, an uptick from July’s 3.2%. On the other hand, the core number, once the unpredictable food and energy prices are excluded, is forecasted to rise by 4.4% Y/Y, a slight reduction from July’s 4.7%. The Cleveland Fed Inflation Nowcast proposes a more drastic escalation in headline inflation at 3.8%, while core inflation could climb to 4.5%. The CPI is widely predicted to surge by 0.6% month-over-month in August, up from 0.2% in July. Concurrently, core CPI is likely to see a marginal increase of 0.2%, a similar growth rate to the preceding month.

Unsettling Trends and Concerns

Kevin Rendino, CEO of 180 Degree Capital (TURN), foresees the August report following a trend that has been prevalent for over a year. Mounting crude prices pose a significant concern as they contribute to fears of prolonged inflation pressures. Although headline and core inflation have retreated from their peak levels in the previous summer, some problematic areas persist. This is according to Greg McBride, Bankrate’s Chief Financial Analyst, who cites housing and car costs as ongoing issues. Market predictions lean towards the Federal Reserve maintaining the status quo on interest rates at their forthcoming meeting, but ambiguity hangs over the outcomes of their final meetings this year.

Key Indicators to Watch

Despite equity market participants hoping for rate cuts, the bond market has made peace with the fact that inflation is likely to stick around longer. This sentiment was echoed by Michael Kramer from Mott Capital Management in his article, ‘The Inflation Nightmare May Come Back To Haunt The Market This Week‘. He points to the ascending trajectory of oil and gasoline prices as an important signal that while the Federal Reserve may be taking its foot off the accelerator regarding rate hikes, they are unlikely to stop completely unless there is a significant shift in the data.