The August U.S. Consumer Price Index (CPI) report is due today at 8:30 a.m. ET, with markets watching the data for clues about the Federal Reserveâs next policy decision. The report comes after the Producer Price Index (PPI) rose 5.4% year over year, above the 5.3% market forecast, pushing Treasury yields higher and putting pressure on stocks, gold and cryptocurrencies.
Markets expect headline CPI to remain at 3.4% year over year, unchanged from the previous reading. Core CPI, which excludes food and energy, is expected to ease from 2.5% to 2.4%.
CPI Expectations for August
Wall Street expects headline CPI to accelerate in August, mainly because of higher energy prices, while core CPI is expected to remain broadly stable.
The median forecast is for headline CPI to rise 0.38% month over month and 3.4% year over year, compared with 0.07% monthly growth in July. For core CPI, the median forecast is 0.22% month over month and 2.4% year over year, compared with 0.22% and 2.5% in July.
The 17 estimates for monthly core CPI range from 0.16% to 0.24%, showing a relatively narrow range of expectations.
Energy Prices Could Lift Headline CPI
The expected increase in headline inflation is largely an energy story. Energy prices are expected to rebound roughly 2.5% month over month after falling 1.5% in July. Gasoline prices are expected to show a 4%+ seasonally adjusted increase.
Food inflation is expected around 0.2%, although the risks are tilted toward a slightly stronger 0.3% reading.
The core inflation picture is more mixed. Airfares are expected to rise around 3% month over month, while lodging prices are expected to rebound after two particularly weak months.
At the same time, medical-care inflation is expected to moderate, apparel prices could decline and used-car inflation is expected to slow. Shelter inflation is also showing signs of cooling.
Technology goods are another area to watch. IT goods prices rose 1.4% month over month in July, partly reflecting previously announced computer price increases. That pressure is expected to fade somewhat in August.
What Different Core CPI Readings Could Mean
The core CPI figure could have a significant impact on expectations for the Federal Reserveâs next decision.
- 0.1% core CPI: Would provide stronger evidence that underlying inflation is cooling and strengthen the case for the Fed to remain on hold.
- 0.2% core CPI: Would keep the decision balanced, with markets likely to focus on the unrounded number, shelter, services and the eventual core PCE read-through.
- 0.3% core CPI: Would be a meaningful upside surprise and could significantly strengthen the case for a 25-basis-point rate hike.
The probability of a Fed hike ended at 73%, with the next meeting scheduled for Wednesday.
Fed funds futures were also pricing roughly 15.5 basis points of tightening for next week, 23 basis points cumulatively by October and 37 basis points by year-end.
How Markets Could React to CPI
The CPI report could determine the near-term direction for stocks, Treasury yields, gold and cryptocurrencies.
A reading above 3.4% headline CPI could increase pressure on markets, while a reading below 3.4% could support a stronger market reaction. A reading of 3.4% could result in a mixed reaction.
The market is also likely to focus on the core CPI number rather than headline inflation alone. A stronger core reading could increase expectations for a rate hike, while a weaker reading could make a Fed hold more likely.
With the Federal Reserve decision only days away, todayâs CPI report could set the direction for rate expectations and risk assets heading into the FOMC meeting.
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