One of the year’s 'most consequential' price reports drops tomorrow—what it could mean for your wallet

Thursday's August CPI data, anticipated to show a 2.9% year-over-year increase, will be a critical input for the Federal Reserve's September 17th rate decision, as price growth remains above the Fed's 2% target. Despite persistent inflation, markets are pricing in a 90% certainty of a 25 basis point rate cut, lowering the benchmark to 4.0%-4.25%. This move is largely driven by a weakening labor market and the Fed's aim to prevent a deeper economic slowdown, though analysts caution that future cuts are not guaranteed should inflation re-accelerate.

Analysis

The market is positioned for a Federal Reserve interest rate cut on September 17, despite upcoming CPI data for August being expected to show an acceleration in year-over-year inflation to 2.9%, up from 2.7% in July. This expectation, priced with 90% certainty for a 25 basis point reduction according to the CME FedWatch Tool, is primarily driven by a deteriorating labor market, which shifts the Fed's focus toward its full employment mandate. Federal Reserve Governor Christopher Waller has signaled support for a cut, citing a 'much softer' labor market as a key reason to act pre-emptively against a more severe slowdown. However, with both CPI and the recent 2.6% Producer Price Index reading remaining well above the Fed's 2% target, significant uncertainty surrounds the path of monetary policy beyond September. Analysts caution that future cuts are 'far from guaranteed', as a resurgence in price pressures could force the Fed to pivot back to a more hawkish stance, creating a challenging environment for navigating monetary policy expectations.

Key Decisions for Investors

• Investors should monitor Thursday's CPI data closely, as a reading significantly above the expected 2.9% could introduce volatility and question the market's conviction in future rate cuts beyond the anticipated September move.
• Given the 90% probability assigned to a September rate cut, focus should shift from the cut itself to the Federal Reserve's accompanying statement and forward guidance for signals on the path of monetary policy into 2025.
• Evaluate positions in rate-sensitive assets, recognizing that while the impending cut is supportive, the risk of persistent inflation highlighted by analysts poses a threat to a sustained dovish policy path.