CPI To Signal Fed's Next Move

The Consumer Price Index report for August is due this morning, and investors are pricing in hot reading as inflationary pressures continue to mount. This is one of the last major data points ahead of the Federal Reserve's rate-setting meeting next week, with bets skewing toward a 25-basis-point hike. Headline CPI is expected to rise 3.4% Y/Y in August, the same pace seen in July. On a monthly basis, CPI is projected to grow 0.4%, accelerating from July's 0.1% increase. Core CPI, which excludes volatile energy and food prices, is seen rising 2.4% Y/Y (vs. 2.5% in July) and 0.2% M/M (in line with July's pace). "The August CPI report has a good chance of revealing that inflationary pressures worsened," said Investing Group Leader Chris Lau. "The positive impact of tariff refunds ended. The Iran conflict continued in August, pushing energy prices higher." The Producer Price Index data released yesterday showed that wholesale inflation remained sticky. "Diesel is the biggest concern because it's an input cost for so many goods and services," said David Russell, global head of market strategy, TradeStation. "This is already appearing with the price of intermediate goods." While markets began this year expecting rate cuts, economists are now penciling in a 25-bp rate hike next week. This shift is fueled by soaring energy prices, with diesel crossing $6 a gallon and crude back over $100. The odds of a 25-bp rate hike next week are currently at 67%, while the probability of another pause is at around 33%, according to the CME Fed Watch tool, which tracks Fed Funds futures. "Today's August CPI release can provide the green light to fully price a September hike with even a marginal upside surprise," ING's Francesco Pesole said. "The picture becomes more nuanced in the event of a downside surprise. Fed Chair Kevin Warsh set a high bar for incoming data to overturn the hawkish narrative, but Christopher Waller later suggested no hike would be needed if inflation continued to improve through August." Treasury yields pushed higher on Thursday after the PPI report, with the rate-sensitive US2Y reaching its highest level since mid-2024 and US10Y rising to a high not seen since late 2023. Further out the curve, US30Y advanced to a 19-year high. The bond selloff is largely due to concerns over inflation and U.S. fiscal health, especially since the Treasury Department's buyback plan failed to impress investors. SA analyst James Picerno said if Treasury yields continue to rise, pressure on the Fed will increase to tighten policy. "We may be at the point where nothing less than a more restrictive monetary stance will calm the bond market by signaling that the Warsh Fed will remain independent of political influence and stay focused on its dual mandate of stable prices and full employment," he added.