Economists are anticipating that the upcoming U.S. Consumer Price Index (CPI) report will reveal another month of subdued inflation, potentially influencing the Federal Reserve’s decision on how much to reduce interest rates at its next policy meeting.
According to projections gathered from a Bloomberg survey, the Bureau of Labor Statistics is expected to report a 0.2% increase in both the overall CPI and the core CPI, which excludes volatile food and energy prices, for August. This would represent a 3.2% year-over-year rise for the core CPI, a marked improvement from inflation levels seen two years ago. Such modest increases might lean the Fed toward a quarter-point interest rate cut, although any downside surprise could increase market bets on a more substantial 50-basis-point reduction.
“Inflation is increasingly becoming less of a priority compared to labor market data when shaping Fed policy decisions,” said Citigroup economists Veronica Clark and Andrew Hollenhorst in their analysis. “However, with the August employment report leaving many questions unanswered, the upcoming CPI data may play a more critical role in determining the size of the Fed’s next rate cut.”
Below are some key components to watch in the CPI report:
1. Rents
Rental inflation is expected to moderate after a temporary uptick in July driven by substantial increases in the Western U.S. While rental prices in this region surged by 0.4%, other parts of the country experienced slower increases. Economists believe this upcoming report will show that rent inflation has resumed its downward trend, which began in June.
Since housing costs account for the largest portion of the CPI, any reduction in rental inflation could allow other services, such as healthcare and airfare, to rebound slightly after declining in July. This should help keep overall inflation stable without creating inflationary pressure.
“The Bureau of Labor Statistics’ tenant rent index suggests that rental inflation is heading for a period of disinflation,” noted Aichi Amemiya, an economist at Nomura. He added that the steady supply of rental properties means that rent inflation is unlikely to accelerate in the near term.
2. Car Insurance
Motor-vehicle insurance prices have been a persistent driver of elevated services inflation over the last two years, with monthly increases typically in the 1% to 2% range. However, there are signs that insurance providers are beginning to ease the pace of price hikes.
According to a report by Morgan Stanley economists led by Diego Anzoategui, “Rate filings in July indicate that insurance companies are asking for smaller premium increases, signaling that inflation in car insurance could decelerate meaningfully in the coming months.” A slowdown in car insurance inflation could help ease inflationary pressures in the services sector.
3. Apparel
The price of core goods dropped by 0.3% in July, largely driven by lower used-car prices. While analysts expect modest decreases for core goods and used cars in August, the apparel category remains a wildcard. Apparel prices saw their largest decline since the beginning of the year in July, but economists are split on whether this trend will continue.
Some analysts, including Employ America’s Executive Director Skanda Amarnath, believe that seasonal adjustment factors could result in another drop in apparel prices in August, potentially influencing the overall inflation reading.
Analysis:
For investors, the upcoming CPI report and its impact on Federal Reserve decisions present an opportunity to navigate shifting economic dynamics. A smaller-than-expected increase in inflation could trigger a more aggressive rate cut, which would be bullish for equities and could spark renewed interest in growth stocks. Conversely, a moderate CPI reading might lead the Fed to opt for a smaller rate cut, maintaining pressure on fixed-income markets as investors continue to seek clarity on the central bank’s longer-term policy path.
This period of uncertainty creates opportunities for strategic positioning, particularly in sectors sensitive to interest rates, such as real estate and utilities, which could benefit from a dovish Fed. Additionally, sectors like consumer goods, which are directly impacted by inflationary trends in rents, apparel, and services, could experience volatility based on the CPI outcome. Investors should keep a close watch on these indicators and adjust portfolios accordingly.
