- The U.S. will be releasing a critical inflation report this Wednesday.
- Irrespective of the outcome, traders should prepare for above-normal volatility.
- The market bet that the report will confirm the Fed's latest assessment that the U.S. inflation is slowing.
July’s Consumer Price Index inflation data will be released on August 14, 2024, at 12:30 p.m. UTC. The Consumer Price Index (CPI) report will provide information on the inflation rate in the United States. Specifically, it will show how prices of goods and services purchased by consumers have changed over the last month. Most investors and traders will be interested in the core inflation rate, which measures changes in prices of a basket of goods excluding food and energy.
The July Consumer Price Index (CPI) inflation report is likely to continue the deflation trend we have seen in recent months. Given the high expectations for a rate reduction in September, it is unlikely that even very high CPI figures would prevent the Federal Open Market Committee from implementing a widely anticipated interest rate reduction at their September 18 meeting.
According to the Federal Reserve Bank of Cleveland, the headline Consumer Price Index (CPI) is expected to come in at 0.24% for the month of July, and the core CPI is projected to be 0.27%. The June CPI reported a –0.1% monthly change in prices and a 0.1% increase in the core CPI, which excludes changes in food and energy prices. The June CPI report showed a 3% annual inflation rate for headline CPI and a 3.3% rate for core inflation.
The Personal Consumption Expenditures Price Index, which is scheduled for release on August 30th, is expected to follow a similar trend, with a 0.2% monthly inflation rate and a 0.22% core inflation rate according to current estimates. These estimates, if accurate, would translate to an annualized inflation rate of 2% to 3%. Therefore, it is unlikely that the July CPI report will cause concern for the Federal Open Market Committee (FOMC), and it will continue to support the overall narrative of inflation returning to lower levels, albeit possibly at a slower rate than the FOMC may prefer.
"Given the increase in inflation since 2021, CPI reports have been critical for the FOMC, naturally. However, as inflation has slowed and is close to the target key rate, CPI data has begun to lose its primary influence", said Kar Yong Ang, Octa analyst. Indeed, inflation at approximately 3%, relatively close to the FOMC’s 2% annual target. On the other side, The Federal Open Market Committee (FOMC) has identified full employment as its primary objective, and unemployment rates have been steadily increasing from a low point of 3.4 percent last summer, to 4.3 percent, according to the July employment report. Such an increase in unemployment could potentially lead to slower economic growth and may prompt the FOMC to adjust its current, relatively restrictive policy on interest rates.
"The July consumer price index report is important, but it is not the main one, unlike the labor market. The FOMC's decision-making process is now primarily driven by the current state of the labor market, especially in light of the recent non-farm payrolls data.", said Kar Yong Ang, Octa analyst.