Week ahead: CPI, earnings and Fed bets set up a big week for stocks

After a strong run for US stocks, the week ahead could ultimately come down to one question: Is inflation cooling fast enough to give the Fed room to ease, or will stubborn price pressures keep higher rates on the table?

The main event comes Wednesday with the release of the US Consumer Price Index for July, followed by the Producer Price Index on Thursday and retail sales on Friday. Economists expect headline CPI to ease to around 3.4% annually, while core inflation is expected to moderate to about 2.5%.

The inflation readings take on added importance after last week’s weaker-than-expected jobs report. July payrolls fell by 23,000, while previous months were revised sharply lower, raising questions about the strength of the labor market. At the same time, the unemployment rate dipped to 4.1%, leaving the Federal Reserve with a complicated picture as it weighs its next move.

“Inflation data is arguably more important than payrolls right now,” Kathleen Brooks said, noting that both headline and core inflation remain above the Fed’s 2% target. A hotter-than-expected CPI report could push September rate-hike expectations higher, she added.

Deutsche Bank expects July headline CPI to rise 0.15% month over month, helped by lower gasoline prices, while core CPI is forecast to increase 0.26%. The bank will be watching for price movements in areas including recreation goods, medical care, hotels and airline fares, as well as signs that recent price increases in memory chips are beginning to feed into consumer electronics.

Thursday’s PPI report will provide another piece of the inflation puzzle. Deutsche Bank expects headline producer prices to rise 0.2% and core PPI to increase 0.3%.