What to expect from the August consumer price index inflation release?

The next consumer price index for August is likely to show further disinflation. This could favor a rate cut, although markets are currently debating the magnitude of a rate cut rather than whether one will happen at all. Given the recent weakness in labor market data and negative revisions to earlier reports, risks to unemployment may attract more attention from the Federal Open Market Committee than inflation risks.

Timing of the release of the Consumer Price Index (CPI) in August and forecasts

The August consumer price index is scheduled to be released at 8:30 a.m. ET on Sept. 11. The previous release for July showed a monthly increase of 0.2% and an annual increase of 2.9%. This is in line with the FOMC's inflation target of 2%. Nowcast forecasts from the Federal Reserve Bank of Cleveland suggest the August consumer price index will be 0.23%, or core inflation at 0.26%, excluding food and energy price fluctuations. This would equate to an annual inflation rate of 2.6% and a higher core inflation rate of 3.2%. Forecasting site Kalshi currently estimates headline inflation at 2.5%.

Publication of PCE inflation

In addition, the personal consumption price index will be updated for July on August 30. The FOMC seems to favor this metric, and although the release is slower, it is expected to show a similar disinflation trend, with nowcasts suggesting an annual PCE inflation rate of 2.6% through July 2024. Therefore, the CPI and PCE inflation metrics could produce very similar readings.

Likely reaction of the FOMC

A cooling of inflation would be welcomed by the FOMC as inflation appears to be returning to its annual target of 2%. There was a spike in inflation in the first few months of 2024 that worried policymakers and delayed a possible rate cut. Now, however, the cooling in inflation numbers appears to be continuing. The Atlanta Fed's Wage Growth Tracker is signaling that wages are cooling, contributing to disinflation. A major driver of inflation right now is housing costs, which rose 5.1% annually in July and accounts for a large portion of the CPI index.

Labor market data is becoming increasingly important

While inflation data is generally improving, labor market data are becoming increasingly worrying. Unemployment has risen from relatively low levels over the past year and is not at the level where the Sahm indicator would suggest that the rise in unemployment could be sufficient to trigger a recession.

Minutes of July FOMC meeting signal interest rate cut

Still, FOMC officials may not be too concerned about the labor market yet. Minutes from the July 30 FOMC meeting state: “Participants generally assessed that overall labor market conditions have returned to roughly the level they were at on the eve of the pandemic – strong but not overheated.” Still, policymakers also acknowledged that “upside risks to the inflation outlook have declined, while downside risks to employment have increased.”

A rate cut in September seems likely

The minutes of the FOMC meeting state: “The overwhelming majority believed that if data continued to be broadly in line with expectations, it would probably be appropriate to ease monetary policy at the next meeting.” The decision for the next meeting will be made on September 18, after the next consumer price index inflation report.

Currently, CME's FedWatch tool, which reflects implied estimates from fixed income markets, suggests that the most likely outcome is a cut in short-term rates to 5%-5.25%, but the odds of a cut to 4.75%-5% are about 1 in 4. Further relatively mild inflation data, such as that expected from the CPI report on September 11, could support a rate cut. Still, unemployment data could become more important in the eyes of policymakers relative to inflation data.