Brace Yourself for a Wild Ride on Wednesday’s CPI Report

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Wall Street is anxiously awaiting the August Consumer Price Index (CPI) report due Wednesday, Sept. 13. After months of improvements, this week’s inflation report is expected to show a notable increase in prices. Ahead of the Federal Reserve’s policy meeting next week, this could be just the indicator the central bank has been looking for to justify another round of rate hikes.

What should you expect from this week’s CPI report?

Well, according to economists polled by The Wall Street Journal, prices are expected to jump 0.6% in August, the largest increase in more than a year. For context, the CPI rose only incrementally the past three months.

Indeed, it’s projected the annual rate of inflation will hit 3.6% in August, up from 3.2% in July and the two-year low of 3% in June.

Oil prices are the primary culprit behind August’s projected increase in prices, with the cost of oil soaring nearly 25% since late July. This is accounted for in the so-called core CPI reading, which excludes food and energy. Core inflation is expected to increase just 0.2% in August, comparable to previous months’ changes.

Interestingly, the annual core inflation rate is expected to drop to 4.3% in August. That’s a nearly two-year low as well as a hearty improvement from July’s 4.7% core reading.

Economists may view the improved core rate as a point of confidence in the economy, as it suggests that prices are generally trending down despite energy pushing the headline rate up.

What Will Wednesday’s CPI Report Mean for the Fed?

It’s unclear exactly how the Fed will interpret Wednesday’s CPI reading.

On one end, inflation is largely attributable to oil prices, something the government is somewhat restricted in affecting. On the other end, even when energy costs were the primary reason for rising prices overall in the past, that didn’t stop the Fed from raising rates regardless.

Last month, Fed Chair Jerome Powell further cemented the hard-line view the Fed has towards its monetary policy going forward. Powell said at the annual Economic Policy Symposium in Jackson Hole, Wyoming:

“It is the Fed’s job to bring inflation down to our 2 percent goal, and we will do so. We have tightened policy significantly over the past year. Although inflation has moved down from its peak—a welcome development—it remains too high. We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”

If you recall, the Fed has raised rates 12 times this cycle, bringing the federal funds rate from near 0% early in 2022 to its current 5.25% to 5.5% level, all in pursuit of lower inflation.

Many assumed such an aggressive pace of rate hikes would inevitably bear down on the U.S. economy in the form of reduced consumer spending, rising unemployment and, eventually, a recession. So far, however, the Fed has managed to lower prices at little-to-no apparent cost.

Wall Street is currently divided between “soft landers” and “hard landers” — that is, those who have faith the Fed can lower inflation without incurring an economic pullback and those who believe a recession is inevitable.

This week’s inflation report will prove invaluable in predicting both the course of the economy as well as the Fed’s plan of action at its upcoming rate-hike decision. The next Federal Open Market Committee (FOMC) meeting is scheduled for Sept. 19 to Sept. 20.

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

With degrees in economics and journalism, Shrey Dua leverages his ample experience in media and reporting to contribute well-informed articles covering everything from financial regulation and the electric vehicle industry to the housing market and monetary policy. Shrey’s articles have featured in the likes of Morning Brew, Real Clear Markets, the Downline Podcast, and more.

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