The August US CPI data will be released tomorrow and will be the last major data point ahead of the Fed’s September FOMC interest rate decision next Wednesday. Markets have fully priced in a 25bps rate cut, with an outside chance (12%) of a bigger half point move. This comes after more evidence of a cooling labour market last Friday saw US non-farm payrolls slow further. Of course, the Fed does have a dual mandate, so price stability will be in focus with the CPI data release, with a softer report likely causing dollar selling as rate cut bets get ramped up.
Consensus expects US headline CPI to rise by +0.3% m/m in August, higher than the prior +0.2% and 2.9% y/y. The core rate is also seen rising by +0.3% m/m, in line with July’s print and 3.1% y/y. Markets will be watching the data again for signs of any further tariff pass-through which could become more evident in the coming months as firms increase imports amid falling inventories.
There is likely to be more evidence of goods price inflation being triggered by tariffs. However, we note that core goods – items most vulnerable to a tariff impact – are only 19% by weight of the inflation basket. On the flip side, housing costs are 33% by weight, and there is likely to be more evidence of softening rents, based on Zillow data and the Cleveland Fed’s measure of new tenant rents and existing rents. Energy prices are also falling while wage pressures that contributed to inflation hitting 9% in 2022 aren’t evident.
Other price gauges and Fedspeak
US PPI came out earlier today, ahead of CPI data, which is a rare event. PPI is the cost of imported goods and essentially measures price changes before they reach consumers. Research suggests if both headline and core PPI are the same way (weak or strong), it’s a pretty decent predictor of both headline and core CPI. If they are mixed or as expected, there is no signal for CPI. In the event, the headline and core PPI were both weaker, potentially signalling softer price pressures from tomorrow’s report.
Nowcast estimates are based on very little information, but the Cleveland Fed’s estimate points to 0.3% gains for both total CPI and core CPI. Strength in the services sector such as the ISM-services gauge and its pick-up in new orders and prices could be a sign of hotter prices. So too some soft data is indicating rising and a lagging risk of higher inflation readings.
Market reaction
Fed officials are now in the blackout period ahead of next Wednesday’s FOMC meeting.  But the majority of the FOMC appear to be siding with the maximum employment side of their dual mandate, rather the price stability, as the key risk for decision making. Governor Waller, a front runner for the new Fed Chief, sees tariffs causing a one-time price rise and believes the Fed should look through it, a view which is slowly becoming more widespread on the Committee.
Current US money market pricing implies around 70bps of cuts for this year, with around 125-150bps until mid-2026 and a terminal rate of 3%. Â It seems the bar is very high to not go through with a rate cut next week, though a hot report would push back rate cuts further out and bolster the dollar in the short term. Â But softer figures in line with the PPI would give the Fed more license to cut at least three times this year, with stocks likely bid and the greenback hit.