The inflation report due out on Tuesday may show prices easing as gasoline and travel costs fall.


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The August consumer price index will be announced at 8:30 a.m. ET on Tuesday, and it is expected to show that inflation is slowing.

The result may be perplexing because experts polled by Dow Jones estimate headline CPI to fall by 0.1% but grow by 0.3% excluding energy and gasoline.

The report is seen as vital direction for the Federal Reserve’s rate decision next week, but analysts believe it is also important for the longer term outlook on interest rates because it may demonstrate if some drivers of inflation are receding.

Inflation is high, but it is likely to cool in August as gasoline prices fall, supply chains strengthen, and travel costs fall.

The consumer price index will be announced at 8:30 a.m. ET on Tuesday, and the report may be a bit jumbled because headline inflation is forecast to fall but core inflation, excluding energy and food, is expected to rise. The study is especially significant because it is expected to impact the Federal Reserve’s decision on how much to raise interest rates next week — and, more crucially, how much to hike interest rates in the long run.

Core CPI, excluding gasoline, is forecast to grow by 0.3%, the same as in July. On a year-over-year basis, that would represent a 6% increase, which would be even higher than the 5.9% gain in that month.

For the Fed, the report is widely expected to confirm the need to maintain its fight against inflation with a 0.75 percentage point raise next week, the third in a row. If inflation data is weaker than expected, some economists believe the Fed may only hike rates by half a percentage point.

“The risk is that it will come in a little softer,” said Aneta Markowska, head economist at Jefferies. “My energy goods are down 10.2%.” That should save you a half-percentage point. I believe the core will be more significant.

Watching prices at the pump

Gasoline prices are the primary cause of the energy price reduction. According to AAA, the national average for unleaded gas has declined all summer, from $5.01 in mid-June to $3.71 per gallon on Monday.

Markowska forecasts a 0.2% drop in headline CPI but a 0.3% increase in core CPI. One area that is projected to rise is housing, while used car costs are expected to fall.

“I believe we will see a recurrence in terms of airfare and accommodation pricing.” They dragged down the core CPI last month. “It appears that airfares will be 8% lower,” said Markowska. “They increased by 40% from March to May.” We’re just getting started on that.

According to economists, the increase in August core inflation is due to the base effects of comparing the statistic to previous year.

“Because of base effects, annual core inflation will likely accelerate in the following two reports,” stated Blerina Uruci, chief U.S. economist at T. Rowe Price. She believes it will not matter to central bank authorities since they will be more focused on momentum and the three- and six-month annualised rates.

However, they are concerned about how it would appear to the public and Congress. “Yet more reason to retain a hawkish stance,” she continued.

According to strategists, the August CPI report may influence the Fed’s September 21 rate decision, but the details included inside that report may be more relevant in terms of what they suggest about the longer-term forecast. This might help set expectations for the Fed’s final, or terminal, rate when it stops raising interest rates.

Looking to the endgame

The market’s projection for the Fed’s terminal rate has been rising, and the futures market predicts it will hit 4% by early next year. Markowska predicts it will be between 4% and 4.25% in January.

“This is where we look for a shift in core patterns, whether the Fed can ramp down or not,” said Diane Swonk, chief economist at KPMG. She anticipates that policymakers will increase the fed funds target range by 75 basis points next week. The fed funds target range would then be 3% to 3.25%. A basis point is equal to 0.01 percent.

This results in strict policy. Then it’s a matter of how tight they want to go,” Swonk explained.

This is an important subject for markets because some experts believe the Fed will take a break by the end of the year. Others anticipate a pause early next year, with some investors expecting the central bank to begin cutting interest rates in the second half of 2023.

Fed officials, led by Chair Jerome Powell, have stated that interest rates will be raised and maintained. Nonetheless, the market continues to believe that authorities would not be as tough as they talk.

This study, in my opinion, does not change much for the Fed. “I think the Fed’s problem is that, even while inflation is dropping, growth momentum is ramping up, thanks in part to decreased energy prices,” Markowska said. “That increases purchasing power.”

She claims that people are transferring cash that were previously spent on gasoline to other goods and services. This might keep the economy hotter than the Fed would like, and she is now forecasting 3% or higher growth in the third quarter.

That’s above-trend growth at a time when the Fed should be engineering below-trend growth,” Markowska explained.


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