Fed Awaits Critical Inflation Data Ahead

Today's US CPI inflation numbers are to be followed tomorrow by PPI.
The consensus forecast is for monthly headline inflation to be 0.2%, bringing the annual measure down to 2.6% (from 2.9%, or the lowest in three and a half years).
Monthly core inflation is also expected at… pic.twitter.com/Qb1jpqy5pv

— Mohamed A. El-Erian (@elerianm) September 11, 2024

The Federal Reserve is set to receive its final look at critical inflation data this week before its policy meeting next week. The consumer price index (CPI) and producer price index (PPI) reports for August will be pivotal in influencing the size of the anticipated interest rate cuts. The recent jobs report provided little clarity on the matter.

Fed officials have shifted their focus from predominantly controlling inflation to addressing growing concerns about the labor market’s condition.

Economists who produce detailed inflation forecasts expect the August CPI to have been relatively mild, as was July.

The median of these forecasts has the core CPI up 0.21%, which would hold the 12-month rate at 3.2%.

Headline CPI is seen decelerating to 2.5%. pic.twitter.com/xEok8OxTh5

— Nick Timiraos (@NickTimiraos) September 10, 2024

The Dow Jones consensus forecast predicts a 0.2% increase in both the all-items CPI and the core CPI, which excludes volatile food and energy items. Annually, this translates to inflation rates of 2.6% and 3.2%, respectively.

PPI is also projected to increase by 0.2% for both headline and core measures.

Inflation still single most important problem facing small business owners in August according to ⁦@NFIB⁩ pic.twitter.com/GYea0YtFwr

— Liz Ann Sonders (@LizAnnSonders) September 10, 2024

While the Fed pays attention to the CPI, it primarily relies on the Commerce Department’s Personal Consumption Expenditures (PCE) index. The PCE recently pegged headline inflation at 2.5% in July.

Fed anticipates critical rate direction

The decision is not whether the Fed will cut rates at the meeting concluding on September 18, but by how much. Market outlooks on Tuesday indicated a 71% probability of a quarter-percentage-point reduction and a 29% chance of a more aggressive half-point cut.

Some economists caution that a minimal cut might be a mistake. Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, suggests that the “summer slowdown probably will look even sharper in a few months,” indicating a continued downward trend in hiring. “We’re disappointed—but not surprised—that FOMC members are leaning towards a 25 basis point easing this month,” Tombs commented.

“However, by the November meeting, with two more employment reports in hand, the case for rapid rate cuts will be overwhelming.”

Markets predict a gradual start to rate cuts in September, but they project a half-point reduction in November and possibly another in December. The benchmark fed funds rate currently stands at 5.25% to 5.50%. “The August CPI report should show more progress in lowering the inflation rate to the Fed’s 2% target,” wrote Dean Baker, co-founder of the Center for Economic and Policy Research.

“Unless there are extraordinary surprises, this report should not deter the Fed from implementing a rate cut, possibly a substantial one.”

The forthcoming inflation data will be the final economic puzzle piece before the Fed’s anticipated rate cut next week. The fresh data is expected to show that inflation remains subdued, providing further evidence that price increases are coming under control after jumping to the highest level in generations in 2021 and 2022.