US CPI Data: Headline inflation expected to gain traction, core prices to decelerate further

The Labor Department will publish at 8:30 a.m. ET its consumer-price index, which is expected to show that headline inflation rose 3.6% in August from a year earlier, versus 3.2% in July. Economists suspect that rising energy prices may have contributed to a slight uptick.

The US Dollar (USD) has been outperforming its rivals since mid-July, with macroeconomic data releases highlighting the relatively upbeat performance of the US economy and tight labor market conditions. In his last public appearance at the Jackson Hole Symposium on August 25, Federal Reserve (Fed) Chairman Jerome Powell reiterated that the Fed is prepared to raise the policy rate further if appropriate. “Inflation remains too high, the process of bringing down inflation still has a long way to go, even with more favorable recent readings,” Powell said.

US CPI inflation data could alter the way markets price the Fed’s rate outlook and significantly influence the USD’s valuation. Investors will also pay close attention to the details of the report to see if there is progress in taming sticky parts of inflation. Heading into the event, the CME Group FedWatch Tool shows that markets are pricing in a 40% probability of the Fed raising the policy rate by 25 basis points (bps) before the end of the year.

What to expect in the next CPI data report?
The US Consumer Price Index, on a yearly basis, is expected to rise 3.6% in August, at a faster pace than the 3.2% increase recorded in July. The Core CPI figure, which excludes volatile food and energy prices, is forecast to rise 4.3% in the same period, down from a 4.7% growth in July.
The monthly CPI and the Core CPI are seen rising 0.6% and 0.2%, respectively. In July and August, Oil prices rose nearly 20%. The impact of rising energy prices on inflation is likely to be reflected in the August CPI increase, hence the 0.6% expectation. Usually, markets pay closer attention to core inflation figures since they strip the price changes in volatile items such as food and energy. Nevertheless, the Fed is unlikely to brush aside the significant increase in energy costs when setting its policy. A stronger-than-expected rise in the CPI could still attract hawkish Fed bets even if the Core CPI eases modestly.
In August, the Prices Paid Index – the inflation component – of the ISM Manufacturing PMI jumped to 48.4 from 42.6 in July, showing a slowdown in input deflation. More importantly, the Prices Paid Index of the ISM Services PMI survey rose to its highest level since April at 58.9, signaling an acceleration in the service sector’s input inflation.
Analysts at Danske Bank provide a brief preview of the key macro data and explain:
“The August CPI marks the final key data release ahead of the September FOMC meeting. We expect the easing wage pressures to translate into further cooling in core services prices, and forecast another core CPI print at +0.2% m/m. While an unchanged rate decision is the clear base case for both us and the markets, the focus will be on the updated 'dots' where a low inflation reading could push some participants to revert their June call for one more hike later in the year.
When will the Consumer Price Index report be released and how could it affect EUR/USD?
The Consumer Price Index (CPI) inflation data for August will be published at 12:30 GMT on Wednesday. The US Dollar Index, which gauges the USD’s valuation against a basket of six major currencies, is up nearly 3% since early August after posting losses in June and July.
The market positioning suggests that the USD faces a two-way risk depending on inflation readings. A higher-than-forecast increase in the monthly CPI could reaffirm one more Fed rate hike either in November or December and provide a boost to the USD. On the flip side, the USD could weaken on a downside surprise to the CPI prints. In this last scenario, risk flows are likely to flood the markets and trigger a capital outflow out of the USD with the initial reaction. Investors, however, could refrain from betting on a persistent USD weakness ahead of next week’s all-important Fed policy announcements, which will be accompanied by the revised Summary of Economic Projections.