The key consumer price index data being released this morning will likely show inflation accelerate in July after a brief slowdown. Economists forecast consumer prices jumped 8.7% last month compared to a year earlier, up from 8.5% in June.
This critical report has the power to rock the markets if inflation spikes more than anticipated. An unexpectedly high reading could shatter hopes that price increases are finally easing and force the Federal Reserve to maintain its aggressive campaign to rein in inflation through steep interest rate hikes.
“With risks turning increasingly two-sided, Fed officials are beginning to shift the focus toward how long to hold rates steady at sufficiently restrictive levels,” Deutsche Bank economists said in a note.
Asian Shares Slip Ahead of Inflation Data
In Asia, Japan’s Nikkei dipped 0.3% while Hong Kong’s Hang Seng index fell 0.5% in morning trading. The Shanghai Composite shed 0.2% and South Korea’s Kospi lost 0.7%.
“A slowdown in consumer spending and high-interest rates remain issues for the global economy,” said CMC Markets analyst Tina Teng.
US Benchmarks Pull Back from Rally
On Wall Street Wednesday, stocks broke a hot streak and the S&P 500 index fell 0.7%, marking its sixth drop in seven days. The Dow lost 0.5% and the tech-heavy Nasdaq gave up 1.3%.
“Several reasons are behind the mini-pullback, including criticism that Wall Street too quickly formed a consensus that inflation will keep cooling, the economy will keep growing and the Federal Reserve has already finished its hikes to interest rates,” the AP reported.
Traders are waiting anxiously to see if the Fed’s fight against inflation is working or if more rate hikes are in store. Cooling inflation is key to avoiding a recession.
Crucial Inflation Indicator
The consumer price index (CPI) offers vital insight into whether inflation is slowing from its breakneck pace earlier this year. Price increases peaked at 9.1% in June — the highest since 1981.
The Fed aims to tame inflation and bring it down to its 2% target through a series of aggressive interest rate hikes. But rate hikes are a blunt tool that slow the entire economy.
“The last bit of improvement to get inflation down to the Fed’s 2% target may be the toughest part,” the AP notes. Further rate hikes could tip the US into a recession.
Markets Hinge on Fed’s Next Moves
The central bank has already raised its benchmark rate four times this year to a range of 2.25% to 2.5%, the highest since 2018. Wall Street expects another large 0.75 percentage point hike at the Fed’s September meeting.
If inflation jumps more than expected, it could force the Fed to keep rates high for longer than anticipated. This scenario would likely send stocks falling over fears of more economic pain ahead.
However, a reading in line with forecasts or lower could boost stocks and stoke optimism that the Fed’s rate hikes are finally slowing price increases.
“Economists say the last bit of improvement to get inflation down to the Fed’s 2% target may be the toughest part. Fed officials have said repeatedly that their upcoming decisions on interest rates will depend on the latest economic data, on inflation and the job market in particular,” the AP stated.
Recent Data Offers Mixed Signals
Recent inflation figures have presented a murky picture. Consumer prices jumped 1.3% in June and a hotter-than-expected 0.9% in May after slowing in April. Producer prices unexpectedly rose in July.
But falling gas prices offered some relief at the pump last month. And supply chain pressures have eased, helping lower prices for cars, furniture and clothes.
Stubbornly high rent, food and healthcare costs continue squeezing family budgets though. Sticky inflation means the Fed cannot relent just yet.
Global Factors Add Uncertainty
Several international factors also cloud the inflation outlook. The war in Ukraine has disrupted energy and grain exports. COVID lockdowns in China and a strong dollar strain supply chains.
Climbing interest rates in Europe and China’s real estate crisis could slow global growth. And recession fears mount worldwide.
“Economists say the last bit of improvement to get inflation down to the Fed’s 2% target may be the toughest part. Fed officials have said repeatedly that their upcoming decisions on interest rates will depend on the latest economic data, on inflation and the job market in particular,” noted the AP.
Markets Wait for Guidance
For now, Wall Street awaits more definitive data to determine whether inflation has turned a corner before adjusting their outlook.
Today’s CPI report will offer critical guidance. An easing of price pressures would reaffirm bets that the Fed can downshift to smaller rate hikes. But an upside surprise will force investors to brace for more financial pain ahead.
“With risks turning increasingly two-sided, Fed officials are beginning to shift the focus toward how long to hold rates steady at sufficiently restrictive levels,” said Deutsche Bank strategists.
After today’s vital inflation update, the markets will look ahead to next week’s annual Jackson Hole summit where Fed Chair Jerome Powell may shed more light on the central bank’s next moves and the future path of rate hikes.
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