Inflation Report to Provide Insight into Fed's Next Move
The upcoming inflation report is expected to show modest increases, which could give the Federal Reserve breathing room in its battle against inflation.
The consumer price index report, due to be released on Wednesday, is anticipated to reveal a modest increase for July, with expectations of 0.1% on the all-items headline number and 0.2% for the core reading. On an annual basis, the rates are expected to be 3.4% and 2.5% respectively, both down 0.1 percentage point from June.
Inflation Expectations
The expected inflation rates are still above the Fed's 2% goal, but two consecutive muted monthly readings could provide the Federal Open Market Committee policymakers with some time before making a decision on interest rates. According to Joe Brusuelas, chief economist at RSM, if the July CPI report is near his forecast, the committee will likely remain on hold for the remainder of the year.
The data will be closely watched, as it will provide insight into the Fed's next move. The FOMC split in a 9-3 vote to hold its key borrowing rate unchanged at 3.5%-3.75% at its July meeting, with the three dissenting voters favoring a quarter percentage point increase. Governor Lisa Cook has also indicated that she sees the need for hiking if the inflation data doesn't cooperate.
Market Expectations
A recent repricing in market expectations has caused traders to see the September meeting as presenting only a 50-50 chance for a hike, with a better likelihood in October or December, according to the CME's FedWatch gauge. The economy is coming off a June that provided some welcome relief in the inflation numbers, with the headline rate down 0.4% on a monthly basis and core flat.
| Category | Expected Monthly Increase | Expected Annual Rate |
|---|---|---|
| All-items headline | 0.1% | 3.4% |
| Core reading | 0.2% | 2.5% |
Potential Outcomes
Some economists are bracing for a potential upside surprise in the July data, which could lead to the Fed hiking rates in September. Bank of America is calling for three rate increases in coming months, citing the July jobs report as evidence that the labor market is stable. Conversely, an average below 0.2% would delay an increase, while anything in between would make September a coin flip.
Cleveland Fed President Beth Hammack expects multiple increases will be needed to bring inflation back down to target. The central bank rarely moves just once in either direction, so if the inflation numbers come in hot, the Fed could face pressure to make multiple moves. The upcoming inflation report will provide crucial insight into the Fed's next move, and its impact on the economy will be closely watched.
