US CPI Friday May Sway Fed’s September Decision

Investors are focused on the Bureau of Labor Statistics consumer price index for August, due Friday, with economists forecasting headline inflation at 3.4% year over year and core CPI, which excludes food and energy, at 2.4% year over year. The release is one of the final major data points before the Federal Open Market Committee meets on Sept. 15-16.

July’s CPI showed headline inflation unchanged at 3.4% year over year and an annual core rate of 2.5%. Core prices rose 0.2% from June to July on a month-over-month basis. Economists expect the annual core rate to slip slightly to 2.4% in August.

The August employment report revived expectations of tighter policy. Nonfarm payrolls increased by 162,000, above the roughly 55,000 that had been forecast. The unemployment rate remained at 4.1% and the labor-force participation rate rose to 61.6% from 61.4%. Those figures led futures markets to raise the probability of a 25-basis-point Fed hike in September, with fed funds futures implying roughly a 57% chance late last week. Market pricing began the week valuing about 15 basis points of tightening for September and roughly 60 basis points through June 2027.

Markets reacted to the jobs data with higher Treasury yields and falling stocks. The 10-year Treasury yield moved toward 4.78%. The S&P 500 closed about 0.38% lower, the Dow fell roughly 0.51%, and the Nasdaq Composite declined around 0.29% in the session following the report.

Bank economists noted that oil price gains related to disruption in energy flows likely pushed the headline inflation figure higher in August. Those analysts added that energy-driven moves are treated differently from sustained increases in core areas such as services when officials judge longer-term inflation trends.

Some strategists outlined how different monthly core prints could affect rate expectations. A 0.3% monthly rise in core CPI would increase the odds of a September hike, while a 0.1% monthly print would lift the chance the Fed stays on hold into year-end. Bruce Kasman, global head of economics at JPMorgan, projects core CPI to rise 0.21% month over month and views that pace as consistent with holding rates for now.

Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions, described the release as unusually important and commented: “What really matters is whether that print really confirms the cooling that we saw in June and July.” Federal Reserve Governor Christopher Waller indicated he would support keeping the policy rate unchanged if inflation continues to moderate, while saying that an acceleration in inflation could change his view.

With only days between the CPI release and the FOMC meeting, investors will examine the headline, core and monthly figures to update expectations about inflation and potential policy action.