Investors are bracing for a hotter-looking inflation print when the U.S. Labor Department releases August's Consumer Price Index (CPI) at 8:30 a.m. ET on Friday. According to a Bloomberg survey, economists expect prices to rise 0.4% from July, a notable acceleration from the 0.1% gain recorded the previous month. On an annual basis, headline inflation is projected to hold steady at 3.4%.
While a faster monthly climb might raise eyebrows, analysts caution that it doesn't necessarily signal a resurgence in inflation. Jefferies, a U.S. investment bank, points to a rebound in gasoline prices after two months of declines as a key driver. Energy costs are volatile and can skew the headline number even when the broader trend remains subdued.
Core inflation: the real focus
Markets and the Federal Reserve pay far more attention to "core" CPI, which strips out food and energy prices. The Bloomberg survey sees core prices rising 0.2% in August, with the annual rate easing to 2.4% from 2.5% in July. That would mark the slowest yearly increase in core inflation since early 2021, a sign that underlying price pressures are continuing to cool.
Core inflation is a better gauge of the economy's momentum because it filters out the noise of volatile items like gasoline and groceries. A steady decline in core readings would reinforce the view that the Fed's aggressive rate hikes are working to bring inflation back toward its 2% target.
What this means for the Fed and your money
The CPI report is one of the most closely watched data points for the Federal Reserve, which has been navigating a delicate balancing act. On one hand, it wants to tame inflation; on the other, it doesn't want to tip the economy into a recession. The expected cooling in core inflation could give policymakers room to hold interest rates steady at their upcoming meeting, a scenario that markets would likely welcome.
For everyday investors, the implications are significant. If inflation continues to ease, the Fed may be less inclined to raise rates further, which could support stock valuations and bond prices. Conversely, a surprise upside in core inflation could reignite fears of more tightening, potentially rattling markets.
It's also worth noting that the recent climb in oil prices has added a layer of uncertainty. Oil's climb above $100 has kept bond markets on edge, as higher energy costs can feed into broader inflation. However, the August CPI report will only capture part of that impact, and the full effect may show up in subsequent months.
Global context
The U.S. inflation picture is part of a global story. Central banks around the world are grappling with similar challenges. For instance, the European Central Bank recently raised rates to 2.5% as inflation persists across the eurozone. Meanwhile, Turkey held rates at 37% for a fifth meeting as its inflation cools, illustrating the wide range of policy responses.
In Asia, Singapore shares slipped as oil prices stoked inflation fears, and Hong Kong stocks fell 1.3% with oil above $100 and U.S. inflation looming. These moves highlight how interconnected global markets are, and how a single data point from Washington can ripple across the world.
What to watch next
Beyond the headline and core numbers, investors will scrutinize the details of the CPI report for clues about the trajectory of prices. Shelter costs, which have been a major driver of inflation, are expected to moderate gradually. Used car prices, another volatile component, could also influence the reading.
If the data comes in as expected, it would mark the third consecutive month of cooling core inflation, a trend that could bolster the case for a "soft landing" — where the economy slows enough to curb inflation without falling into a deep recession. That scenario would be favorable for most asset classes, from stocks to bonds.
However, the path is far from certain. Energy prices remain a wildcard, and geopolitical tensions could push oil higher, complicating the inflation outlook. For now, investors will be watching Friday's report closely, ready to adjust their portfolios based on what it reveals about the health of the U.S. economy.
As always, it's important to remember that a single data point doesn't define a trend. But for those with money in the markets, the August CPI report is a key piece of the puzzle in understanding where inflation — and interest rates — are headed next.
