Wednesday’s consumer price index release carries significant weight for Federal Reserve policymakers navigating a difficult and uncertain inflation environment.
The Bureau of Labor Statistics will publish the July CPI data at 8:30 a.m. ET, with economists expecting only a modest monthly increase across key measures.
The Dow Jones consensus forecast calls for a 0.1% rise in the headline all-items figure and a 0.2% increase in the core reading, which strips out volatile food and energy prices.
On an annual basis, headline inflation is expected to come in at 3.4% while core is forecast at 2.5%, both down 0.1 percentage point from June’s figures.
Although those annual rates remain well above the Fed’s 2% target, two consecutive muted monthly readings could provide Federal Open Market Committee policymakers with time before acting on interest rates.
“If we get a July CPI report anywhere near my forecast, the balance of the committee is going to look right through the supply shock, and the FOMC will remain on hold for the remainder of the year,” said Joe Brusuelas, chief economist at RSM.
Brusuelas added that the data would provide “something of an assist” for Fed Chairman Kevin Warsh, who has faced stiff policy challenges since taking the post in May.
At its July meeting, the FOMC voted 9-3 to hold its key borrowing rate unchanged at 3.5%-3.75%, with the three dissenters all favouring a quarter-percentage-point increase.
Governor Lisa Cook has also indicated she sees the need for hiking if inflation data fails to cooperate with the Fed’s goals in the months ahead.
Traders currently assign roughly a 50-50 probability to a rate hike at the September meeting, according to the CME’s FedWatch gauge, with October or December seen as more likely moments for action.
The Fed will have the advantage of reviewing both July and August inflation readings before convening again, as the central bank skips its August meeting while the Kansas City Fed hosts its annual symposium in Jackson Hole, Wyoming.
“If you’re not confused, you’re not paying attention,” Brusuelas said. “That’s a good synopsis of where we’re at here in mid-August.”
June delivered some welcome relief on the inflation front, with the headline monthly rate falling 0.4% and core coming in flat, driven largely by receding energy prices and moderating shelter costs.
A separate report last Friday showed nonfarm payrolls fell by 23,000 in July, even as the unemployment rate dropped to 4.1%, adding further complexity to the Fed’s policy calculus.
Bank of America is still forecasting three rate increases in coming months, arguing the July jobs report “didn’t change the overall picture on the labor market — it’s stable.”
BofA’s economists noted that “the Fed’s reaction function is heavily skewed towards the inflation data as noted by recent Fed speak,” underscoring inflation’s central role in driving any policy decision.
Should the Fed’s primary inflation gauge average 0.25% increases over the next two months, “it is all but guaranteed that the Fed will begin hiking rates in September,” Bank of America said.
An average below 0.2% would delay an increase, while anything in between would make September “a coin flip,” the BofA report said, with the outcome depending heavily on Warsh’s own leanings.
Cleveland Fed President Beth Hammack, one of the three July dissenters, said Monday she expects multiple rate increases will likely be needed to bring inflation back under control.
“I don’t know exactly where we’ll end. I would say in general, one 25-basis-point move probably doesn’t do a whole lot for the economy. So, it’s probably some number of movements, but I don’t want to prejudge what that number is going to be,” Hammack said in a Yahoo Finance interview.