Will US inflation justify a 50 bps rate cut in September? Fears of an imminent US recession creeped into markets, and investors need a soothing report.
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Why CPI inflation draws so much attention
The Federal Reserve (Fed) has been fighting inflation in the pat few years, and the Consumer Price Index (CPI) report is the first piece of hard evidence about price developments. The central bank focuses on core CPI, which excludes volatile energy and food prices. Core CPI MoM is the most market-moving release.
The CPI report for July comes after several turbulent weeks in markets. Investors fear a US recession following the downbeat Nonfarm Payrolls (NFP) report which showed a bump up in the unemployment rate to 4.3%. The Sahm Rule, which is a time-tested empirical tool predicting recession using the unemployment rate, was triggered. However, the rule's originator, Claudia Sahm, played down its importance in current circumstances.
A drop in inflation would provide the Fed more confidence to cut rates, lowering the chances of a downturn. Hotter prices would disappoint markets and could trigger another crash. Many market participants are on holiday in August, meaning outsized responses to incoming data.
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