Forecasts for August CPI Report Show Inflation Easing Further

Forecasts for August’s Consumer Price Index report show inflationary pressures continuing to ease. That’s good news for the Federal Reserve, which is approaching its first interest rate cut after aggressively tightening policy when inflation spiked to 40-year highs in the spring and summer of 2022.

Two years later, with inflation approaching the Fed’s target level, investors expect the central bank to turn its attention to a cooling labor market and ease policy to prevent a recession. Complicating matters are two weaker-than-expected jobs reports, which have raised questions about how aggressively the Fed will need to cut rates.

Forecasts Show Another Benign Inflation Report

Overall, economists are anticipating that CPI inflation rose 0.2% in August, according to FactSet’s consensus estimates. That would be in line with July’s 0.2% increase and would bring the annual inflation rate down to 2.6% from 2.9%. They expect core CPI inflation, which excludes food and energy prices, to increase 0.2% in August and 3.2% on an annual basis.

The Fed “would be very content with that,” says Kathy Bostjancic, chief economist for Nationwide Mutual. “These types of benign readings give them the green light to cut rates and focus their attention on the labor market, which is clearly slowing.” Bostjancic is looking for a 0.1% bump in the overall monthly inflation rate in August, which is slightly below consensus. Her forecast is for a 2.5% annual rate of inflation.

“The Fed has been looking for a reassuring string of [inflation] data,” adds Carl Tannenbaum, chief economist for Northern Trust. “Fortunately for them, and the markets, they’ve been getting it.”

August CPI Report Highlights

• CPI report release date and time: Wednesday, Sept. 11, at 8:30 a.m. ETD
• The CPI is forecast to rise 0.2% in August after rising the same amount in July
• Core CPI is forecast to rise 0.2% in August after rising the same amount in July
• The CPI year over year is forecast to rise 2.6% in August after rising 2.9% in July
• Core CPI year over year is forecast to rise 3.2% in August after rising the same amount in July

Inflation has been steadily moderating for the past several months, and economists expect to see the overall trend continue in August. Bostjancic says falling gasoline prices will help bring down the overall inflation rate, while goods prices “remain squarely in deflationary territory.”

Some services prices will prove slower to ease, however. “We continue to expect a divergence between core goods and services prices,” Bank of America analysts wrote earlier this month. “This is due in large part to sticky rent inflation, which surprised to the upside last month.”

Elevated shelter costs have been one of the largest drivers of overall inflation over the past two years. While Bank of America’s analysts caution that month-to-month data on rent inflation may remain choppy, they say they expect the trend to return to prepandemic levels over the medium term.

Bostjancic says inflation in the transportation services sector may also remain sticky in August, though a cooling labor market and slower wage inflation should ultimately take some pressure off prices overall.

How Much Will the Fed Cut Rates?

Investors are nearly unanimous in believing the Fed will cut rates at its upcoming September meeting. But recent cooling in the labor market has called into question the scope of that cut, and investors are divided over exactly how much the central bank will ease policy.

Traders see a roughly 71% chance that the Fed will reduce rates by a quarter of a percentage point, according to the CME FedWatch Tool. That would bring the target federal funds rate down to a range of 5.00%-5.25%. Traders see a 29% chance of a larger half-point cut, which would be a more aggressive move.

As it determines the path of interest rates, analysts expect the Fed to focus less on inflation and more on the labor market and other measures of economic health. “Beyond the first cut, we think that activity and labor market data will be a more important determinant of the pace and depth of the cutting cycle than inflation,” Bank of America analysts wrote. “In other words, the Fed’s reaction function is starting to put more emphasis on its other mandate: maximum employment.”