Inflation Check

All eyes are turning to the Consumer Price Index report due later today, as traders hope for more clues on whether the Federal Reserve is done with its tightening cycle. The headline inflation rate has been steadily tracking downwards at around 2.5% in the past couple of months, bolstering expectations of a soft landing. However, the core figure remains elevated, because of which Fed officials are hesitant to declare victory in their fight to tame inflation. 

Market expectations: Headline inflation is expected to rise 3.6% Y/Y in August, accelerating from 3.2% in July. However, the core number - excluding volatile food and energy prices - is expected to increase 4.4% Y/Y, easing from 4.7% in July. The Cleveland Fed Inflation Nowcast estimates an even bigger increase in headline inflation, to 3.8%, while core inflation is estimated to ramp up to 4.5%. On a month-over-month basis, CPI is widely expected to rise 0.6% in August from 0.2% in July, and core CPI is anticipated to scale 0.2% higher, the same increase it saw in the prior month.

Trouble spots: Kevin Rendino, CEO of 180 Degree Capital (TURN), expects the August report to show "a similar trend to what we've been seeing for over a year." A major concern is rising crude prices, which have fueled concerns of inflation pressures continuing for longer than expected. While headline and core inflation have receded from their peaks of last summer, "some trouble spots remain," said Bankrate Chief Financial Analyst Greg McBride, including shelter and automotive costs. Markets continue to expect the Fed to leave rates unchanged at its meeting next week, although there is still some uncertainty regarding the remaining meetings this year. 

What to watch: Even as the equity market dreams about rate cuts, the bond market has accepted that inflation will likely be here for longer, Mott Capital Management's Michael Kramer noted in The Inflation Nightmare May Come Back To Haunt The Market This Week. With oil and gasoline prices on the rise, "it serves as a reminder that the Fed may be slowing the pace of rate hikes, but unless the data starts to change materially, the Fed probably isn't finished raising rates." (3 comments)