CPI Forecast

The inevitable corollary of the Fed shifting its focus from inflation to the labor market when deciding the path of monetary policy moving forward is that inflation data, including today's CPI report, will become less market-moving than it had been. Despite that logical observation, this month’s CPI report may still lead to market volatility as traders are not 100% certain what the US central bank will do later this month.

Per the CME’s FedWatch tool, Fed Funds futures traders are discounting about a 75% chance of a 25bps rate cut next week, with a roughly 1-in-4 probability of a larger 50bps “double” interest rate reduction. As the last major economic release ahead of next week’s Federal Reserve Monetary Policy meeting, the US CPI report may decide which path Jerome Powell and Company choose.

As many readers know, the Fed technically focuses on a different measure of inflation, Core PCE, when setting its policy. Still, the CPI report is at least as significant for traders because it was released weeks earlier. As the chart below shows, the year-over-year measure of US CPI has resumed its decline from the 2022 peak in recent months, though one of the best leading indicators for future CPI readings, the ISM PMI Prices component, has stopped falling:

As the chart above shows, the “Prices” component of the PMI reports has remained in the mid-50 region, corresponding to CPI inflation holding steady its same 3% range in the coming months.

We predict tonight's CPI will stabilize or rise based on the above data. Last week's average hourly earnings data also showed a significant increase compared to the previous month. Rising individual income can encourage higher consumption.