US CPI Preview: The Fed’s 0.3% Rate Hike Trigger for Core CPI

US CPI KEY TAKEAWAYS:

• US CPI expectations: 3.4% y/y headline inflation, 2.4% y/y core inflation
• A core CPI reading that rounds to 0.3% m/m or even an unrounded reading above 0.20% would signal that inflation is not slowing sufficiently, and a Fed rate hike may be necessary next week.
• The technical setup in the US Dollar Index (DXY) hints at a turn higher, especially if the CPI report comes in hotter than anticipated.

When is the US CPI report?

The US CPI report for August will be released at 8:30ET (12:30 GMT) on Friday, September 11.

What are the US CPI Report Expectations?

Traders and economists are projecting headline CPI at +0.4% m/m (3.4% y/y) and Core CPI at +0.2% m/m (2.4% y/y).

US CPI Forecast

It’s a common financial media trope that every inflation or jobs report is “The Most Important Economic Release in Years,” but in the case of this month’s CPI report, it may actually be true.

Because the Fed is primarily concerned about inflation, especially in the wake of last week’s stronger-than-expected NFP reading, and because there’s significant doubt about what the FOMC’s decision framework is under Chairman Kevin Warsh, this month’s CPI could very well determine the Fed’s interest rate decision.

Underscoring that point, FOMC member Christopher Waller was unusually candid in a speech last week, when he said a cooler CPI would make him inclined to hold rates, while a hot reading could lead him to support a hike. While that is only one voter, it is likely that other FOMC members feel similarly: A core CPI reading that rounds to 0.3% m/m or even an unrounded reading above 0.20% would signal that inflation is not slowing sufficiently, and a rate hike may be necessary.

As the chart below shows, Fed Funds Futures markets are currently pricing in about a 2-in-3 chance that the central bank will raise interest rates at its meeting next month:

Source: CME FedWatch

As many readers know, the Fed technically focuses on a different measure of inflation, Core PCE, when setting its policy, but for traders, the CPI report is at least as significant because it’s released weeks earlier. As we noted above, has remained stubbornly above the Fed’s 2% target for a half-decade already, and leading indicators are suggesting it could rise further from here:

Source: TradingView, StoneX

Looking at the chart above, the “Prices” components of the PMI reports ticked higher last month and still point to a higher headline inflation reading if the historical correlation holds. A hot reading (+0.25% m/m+) would likely be enough to prompt the FOMC to raise interest rates next week, especially with September CPI likely to rise amidst the ongoing surge in oil prices. Only a surprisingly low reading (0.1% m/m or less) would cast significant doubt on a hike at this point.

Either way, the stakes are high heading into this month’s CPI report, so traders should be prepared for significant volatility.

US Dollar Index Technical Analysis – DXY Daily Chart

Source: TradingView, StoneX

Turning our attention to the world’s reserve currency, the US Dollar Index (DXY) is showing early signs of a potential near-term bottom after testing 98.50 support earlier this week. As the chart above shows, the greenback is bouncing from that zone, and the 14-day RSI is showing a potential bullish divergence. This setup signals waning selling pressure on the retest of support and hints at a turn higher, especially if the CPI report comes in hotter than anticipated.

At this point, only a surprisingly soft CPI reading would cast doubt on the Fed’s September intentions, with the US Dollar Index likely to retest 98.50 support in that scenario.

-- Written by Matt Weller, Global Head of Research

Check out Matt’s Daily Market Update videos on YouTube and be sure to follow Matt on Twitter: @MWellerFX