August CPI Data Key for Fed's September Rate Decision
The August Consumer Price Index report, due Friday, is the final major inflation data before the Federal Reserve's policy meeting next week.
The Federal Reserve will receive its last major inflation snapshot before next week's policy meeting when the August Consumer Price Index is released Friday morning. The Bureau of Labor Statistics will publish the data at 8:30 a.m. ET.
According to the Dow Jones consensus, the report is expected to show overall prices rose 0.4% for the month, pushing the annual inflation rate to 3.4%. The outlook for core inflation, which excludes volatile food and energy costs, is more subdued.
| Measure | Monthly Change (August) | Annual Rate (August) |
|---|---|---|
| Headline CPI | 0.4% | 3.4% |
| Core CPI | 0.2% | 2.4% |
Data's Role in Fed Policy
The CPI data, combined with Thursday's Producer Price Index report, will heavily influence the Federal Open Market Committee's interest rate decision next Wednesday. A small percentage point shift in the data could determine whether the Fed holds rates steady or implements a hike.
Nomura economists stated the decision hinges on this data. "The September FOMC decision ultimately hinges on the CPI data... Since a majority of PCE components are derived from CPI," they wrote. They currently expect no rate hike in September but warned that an upside surprise in the CPI, especially in components relevant to the Fed's preferred PCE gauge, would significantly increase the likelihood of policy tightening.
Market Expectations and Volatility
Following the PPI release, market expectations for a rate increase shifted. Traders using the CME Group's FedWatch tool raised the odds of a quarter-point hike to over 73%. These expectations have been highly volatile, sensitive to incoming data and fluctuating energy prices.
Fed Chair Kevin Warsh has indicated the central bank relies on market indicators for guidance on monetary policy direction. This adds to the significance of Friday's data release for financial markets.
Analyst Views on the Decision
Some analysts believe recent energy price movements may already be steering the Fed toward action. Bill Adams, chief U.S. Economist at Fifth Third Commercial Bank, said the decision looked finely balanced earlier in the month. "September's surge in energy prices will likely tip the balance towards a hike when the Fed meets next week," Adams stated. He added that a major surprise in the August CPI or a last-minute geopolitical development could still influence the final call.
The CPI report will help Fed officials forecast their primary inflation gauge, the Personal Consumption Expenditures price index, which is scheduled for release at the end of September.
