Following last Friday's surprisingly soft jobs report, all eyes are now focused on Wednesday's Consumer Price Index (CPI) data. The report comes at a crucial time, with markets divided over whether the Federal Reserve will raise rates in September, and this inflation print may well be the deciding factor.
---
What's Expected
On Wednesday, August 12, at 8:30 AM ET (12:30 PM GMT), the Bureau of Labor Statistics will release July CPI data. According to Cleveland Fed's Inflation Nowcasting tool, headline CPI is expected to be 3.32% year-on-year, down from 3.5% in June.
| Metric | Prior (Jun) | Forecast (Jul) |
|---------------|-------------|----------------|
| CPI (YoY) | 3.5% | 3.3% - 3.4% |
| Core CPI (YoY)| 2.6% | 2.5% - 2.6% |
| CPI (MoM) | -0.4% | -0.4% |
However, economists are looking for core CPI to tick down slightly from 2.6% to 2.5% year-on-year. The market reaction is likely to hinge on the surprise factor – the spread between forecasted and actual figures.
---
Why This Report Matters Now
Last Friday's payrolls report indicated a surprise 23,000 drop in jobs in July, contrary to expectations of an 83,000 gain. Payrolls for May and June were also revised significantly lower, providing the Fed with "breathing room" to sit out a September rate hike. As Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, stated, "The weak payrolls print may ease the pressure on the Fed to raise rates at its September meeting, but next week's inflation data will still likely be the deciding factor."
The oil shock is the wildcard. July saw crude prices surge around 21% due to renewed conflict in the Middle East, impacting energy markets. West Texas Intermediate crude rose by approximately 21% during the month, while Brent crude climbed by about 24%.
Cleveland Fed data shows that while headline inflation is expected to ease, core PCE – the Fed's favored inflation metric – is projected to reaccelerate to 3.36% in July.
This persistent core inflation suggests that the price shocks caused by the Iran conflict have spread into the wider economy and are not just an energy-specific phenomenon. Higher energy costs are felt across the entire economic spectrum, from transportation and manufacturing to consumer goods, with higher costs often passed on to end consumers.
According to a Financial Times report, Federal Reserve Chairman Kevin Warsh remains open to a September rate increase if inflation figures exceed expectations. Markets are currently pricing in a higher likelihood of rates holding at 3.5%-3.75%, but a hot CPI print could swiftly alter this outlook.
---
The Three Scenarios
* Goldilocks (3.3% - 3.4% YoY | Core stable):
This scenario is the most favorable for risk assets, confirming cooling inflation without a downturn.
* DXY: Could weaken slightly.
* Gold: Could push toward $4,300+.
* Fed Odds: September hold probability likely to remain above 60%.
* Hot (Above 3.5% YoY | Core sticky):
A strong inflation print would reinforce the Fed's hawkish stance and increase the probability of a September hike.
* DXY: Likely to rally back toward 100.50-101.00.
* Gold: Could test $4,000 support.
* Fed Odds: September hike probability likely to jump above 50%.
* Cold (Below 3.2% YoY | Core weakens):
This is the most market-friendly scenario and would revive hopes of policy easing.
* DXY: Could accelerate its sell-off toward 98.60-98.00.
* Gold: Could break above $4,200 and target $4,300+.
* Risk Assets: Likely to rally on dovish sentiment.
---
What to Watch
The August 12 CPI report is the first of five upcoming inflation prints prior to the September FOMC meeting. A hotter-than-expected reading could swiftly shift investor expectations for the September meeting. The 30-year Treasury yield remains near a nearly two-decade high, indicating that investors are demanding higher compensation for long-term inflation risk.
Key risks: If the CPI data comes in higher than expected, and is followed by robust PPI and PCE figures later in the month, the odds of a September rate increase will likely climb rapidly. Coupled with July's oil price surge and Treasury yields near 20-year highs, the case for a tighter monetary policy becomes increasingly compelling. For now, a hold is the base case, but this week's inflation data could easily change that narrative.
I’ve been using Exness for my trading and the experience has been smooth so far. If you’re looking to start, feel free to use my referral link below:
👇 My Exness referral link:
Copy the link and paste Google
one.exnessonelink.com/a/bk9ax09i2w
