The report released Friday morning will be the final piece of the inflation puzzle the Fed has before deciding on interest rates next week.
The Bureau of Labor Statistics will release the Consumer Price Index for August at 8:30 a.m.
If the Dow Jones consensus is correct, the report would show that the cost of all measured goods and services rose 0.4% last month, bringing the annual inflation rate to 3.4%. However, excluding food and energy prices, the outlook for core inflation is 0.2% and 2.4%, respectively.
Combined with Thursday’s Producer Price Index data, a measure of wholesale inflation, the CPI will help tell Fed officials what their main inflation measure, the Personal Consumption Expenditure Price Index, will show when it is released at the end of September.
This information is also expected to factor heavily into the Federal Open Market Committee’s rate decision next Wednesday, and either percentage point could mean the difference between keeping rates unchanged and raising rates.
“The FOMC’s decision in September will ultimately depend on the CPI data, as the majority of the PCE component is derived from the CPI,” Nomura economists said in a note. “For now, we maintain the Fed’s insistence that there will be no rate hikes at the September FOMC meeting. However, an unexpectedly strong August CPI data, particularly the PCE-related component, would significantly increase the likelihood of a policy decision next week.”
Following Thursday’s PPI release, traders raised the probability of a quarter-point increase to more than 73%, according to CME Group’s FedWatch futures price gauge.
But expectations are volatile and highly dependent on data and fluctuating energy prices, making the bets even higher on Friday’s announcement. Federal Reserve Chairman Kevin Warsh said the Fed relies on market indicators to determine the direction of monetary policy.
“The Fed’s decisions in September looked very balanced at the turn of the month,” said Bill Adams, chief U.S. economist at Fifth Third Commercial Bank. “The September energy price spike will likely tip the balance toward rate hikes at the FOMC meeting next week.” “A big surprise with the August CPI report due out tomorrow and a last-minute deal with Iran could still influence the decision.”
