Boy Wirat
The headline U.S. Consumer Price Index for August, due out on Wednesday, is primed for another soft reading – helped by a decline in gasoline prices during the month – further supporting interest-rate cuts by the Federal Reserve when it gathers on September 17-18.
Fed policymakers have made plain it’s time to cut rates. But the biggest debate on Wall Street now is whether the policy-setting Federal Open Market Committee will cut borrowing costs by the standard 25-basis-point increment or a jumbo 50 bps from the current target range of 5.25%-5.50% – a more than two-decade high. Fed funds futures traders currently see a greater chance of a 25-bp reduction than a 50-bp cut, with a 69.0% probability for the former and a 31.0% chance for the latter, according to the CME FedWatch tool.
Considering the Fed’s dual mandate of stable prices and full employment, two things are clear at the moment: inflation is receding, and the labor market is gradually cooling. With inflation heading toward its 2% target, the central bank recently pivoted its focus to the jobs market as it gears up to cut rates after holding them at a 23-year high for over a year, making the relative importance of inflation smaller.
Economists, on average, expect CPI to post another 0.2% monthly gain in August. That would represent a 2.6% Y/Y increase, down from July’s 2.9% gain. Stripping out volatile food and energy prices, core CPI is also expected to rise 0.2% in August, translating to a Y/Y increase of 3.2%, unchanged from the previous month.
In addition to the pullback in gas prices, “any moderation in shelter inflation will carry a lot of weight – and be long overdue,” said Bankrate Chief Financial Analyst Greg McBride. “Shelter costs contributed roughly 90% of July’s increase in CPI and more than 70% in the year-over-year increase in core CPI.”
“Unless core CPI comes much higher than expected, the Fed is likely to cut in September by 25bpt,” Seeking Alpha analyst Damir Tokic said in The August CPI Preview: The Last Hurdle To Fed Cuts. “However, the market needs a 50bpt cut, and if the core CPI comes weaker than expected at 0.1% MoM, this could possibly increase the chance of a 50bpt cut.” SA’s Mott Capital Management shares Tokic’s view in The CPI Report Could Spark A Chain For Technology Stocks.
Fellow SA contributor Chris Lau agrees with Tokic’s assessment, saying unless CPI comes in sharply lower than expected, “markets should not expect the Fed to react aggressively” with a 50-bp cut.
Wholesale inflation is also on tap this week. Unlike the CPI, the August Producer Price Index is seen accelerating to +0.2% M/M from +0.1% in July. Excluding food and energy, core PPI is expected to rise 0.2% M/M vs. July’s flat reading.
Even so, Eric Wallerstein Chief Markets Strategist at Yardeni Research, expects China’s PPI deflation to weigh on both U.S. import prices and PPI goods, he wrote in an X post.
The U.S. Bureau of Labor Statistics is slated to report the PPI on Thursday, a day after its CPI release.
