Friday’s U.S. consumer price index report for August could be the final and most consequential inflation signal the Federal Reserve receives before next week’s interest-rate decision.
The Bureau of Labor Statistics is due to release the report at 8:30 a.m. According to the Dow Jones consensus, prices for all measured goods and services rose 0.4% last month, leaving the annual inflation rate at 3.4%. Excluding food and energy, core inflation is expected at 0.2% on the month and 2.4% on the year.
Together with Thursday’s producer price index data, the CPI release will help Fed officials and investors gauge what the personal consumption expenditures price index may show when it is published at the end of September. The PCE measure is the central bank’s main inflation benchmark.
The figures are also expected to weigh heavily on next Wednesday’s Federal Open Market Committee decision. Markets are debating whether the Fed will leave rates unchanged or raise them again. After Thursday’s PPI report, traders lifted the probability of a quarter-percentage-point increase to above 73%, according to CME Group’s FedWatch tool.
Nomura economists said in a note that the September FOMC decision ultimately hinges on CPI data because most PCE components are derived from it. Their base case remains no rate hike at the September meeting, but they said an upside surprise in the August CPI report — especially in components relevant to PCE — would materially increase the chances of policy tightening next week.
Analysts say expectations remain highly fluid, driven both by incoming data and by swings in energy prices. Fed Chair Kevin Warsh has also indicated that market indicators are an important guide for monetary policy.
Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, said the September decision looked finely balanced at the start of the month, but September’s jump in energy prices will likely push the balance toward a rate increase. Even so, he added that a major surprise in the August CPI release or a last-minute deal with Iran could still affect the Fed’s call.
