The US CPI is about to determine the outcome. How will the US dollar and the Federal Reserve’s policies fluctuate?
2025-09-10 10:48:34
The inflation outlook appears precarious, with data released this week likely to show a month-on-month increase of about 0.3% in CPI last month, which could push the annual rate to around 2.9%. Some market analysts even believe the annual rate could reach 3%.
The rebound in inflation appears to be related to rising food and energy costs, with some forecasts even pointing to a 2% month-on-month surge in gasoline prices. Therefore, inflationary pressures persist and consumers are likely to feel significant price increases when they pay the bills.
The real focus of the debate is the core CPI data - the indicator that excludes more volatile food and energy prices.
Analysts are currently divided into two forecast paths: one predicts a 0.3% month-over-month increase, keeping the annual rate around 3.1%. The other, more cautious group predicts a 0.4% jump—the largest increase since January and the second-highest in nearly two years. The tiny difference between 0.3% and 0.4% is more than just a numbers game; it could completely change the market's interpretation of inflation trends.
If the growth is 0.3%, it can still be called "sticky", but it may mean that prices are experiencing a tortuous and slow downward channel; while a 0.4% increase will clearly send a signal of inflation rebounding, which will shake the market consensus that "inflation is finally under control."
The rise in inflation appears broadly distributed across a wide range of goods, rather than confined to a single sector. A rebound in core goods prices could push the monthly increase by around 0.25%, which would bring the annual rate to its highest level since May 2023. The main drivers are likely to come from categories such as new cars, apparel, sports equipment, and even mobile phones and tablets.
Meanwhile, market expectations for a slowdown in services inflation appear to be failing to materialize. Forecasts indicate that core services prices likely rose by approximately 0.30% month-over-month in August, with tourism-related services—particularly hotel charges—expected to see a strong increase of around 1%. This broad-based strength in both goods and services suggests that price pressures are no longer confined to specific sectors but may be more deeply rooted in the broader economy .
While the labor market remains the focus of current policy discussions, policymakers will undoubtedly keep a close eye on these inflation trends.
The Fed's road ahead is expected to be bumpy. Concerns about its independence, deteriorating labor market conditions, and political drama will keep the Fed at the center of public opinion for the remainder of 2025.
For now, the labor market remains the focus, but inflation could play a larger role later this year if it starts to creep back up as tariffs take effect and businesses pass on costs to consumers.
The CPI report primarily drives the dollar through two channels: first, interest rate differentials—the difference between U.S. Treasury yields and those of other countries, which determines the direction of capital flows; and second, market expectations of Fed policy—investors' assessment of the probability of a rate hike or cut, which alters interest rate differentials. When CPI data alters market expectations of Fed action, it also alters the attractiveness of U.S. assets, thereby boosting or depressing the dollar.
If the CPI data shows a "hot" reading (e.g., core CPI reaching 0.4% or higher), it suggests stubborn inflation, potentially forcing the Federal Reserve to maintain or even intensify its tightening policy. This would lead to increased dollar positions, higher Treasury yields, and a strengthening of the US dollar index (DXY). Meanwhile, the stock market could come under pressure from rising financing costs.
Conversely, a "mild" CPI (core CPI ≤ 0.3%) indicates slowing price growth. Markets may shift to dovish expectations, believing the Federal Reserve will pause rate hikes or cut them sooner rather than later. Falling yield expectations diminish the dollar's appeal, typically leading to a decline in the dollar. While US Treasury yields tend to decline, riskier assets (such as stocks) may benefit from expectations of improved liquidity.
In short, the trend of the US dollar follows the transmission chain of "CPI data → expectation revision → interest rate reassessment → exchange rate adjustment" .
Possible scenarios based on the above logic:
Hot CPI (core ≥ 0.4%): USD strengthens against other currencies (DXY rises); US Treasury yields rise; stocks may come under pressure.
Moderate/neutral CPI (core ≤0.3%): The US dollar may be sold off; US Treasury yields fall; and the stock market may rebound.
If the CPI data is exactly in line with expectations (core CPI is exactly 0.3%), the market sometimes plays out the "buy the forecast, sell the facts" game. If investors have already priced in hawkish expectations, data that meets the consensus could actually trigger a technical correction in the US dollar, highlighting why the degree to which the actual data deviates from the market consensus is crucial.
In the current environment, the market has expected inflation to pick up slightly, which means that if the actual data is unexpectedly weak, the market may immediately reprice the probability of a 50 basis point interest rate cut on September 17, leading to a short-term sell-off of the US dollar, but this trend is difficult to sustain, and market sentiment tends to calm down after the data is fully digested.
US stocks have gained significant traction following their recent rally. Regardless of the CPI data, US stocks are expected to experience greater volatility than other asset classes . Positive data could bolster risk appetite, while negative figures could trigger profit-taking, creating a pattern of high two-way volatility.
(Daily chart of the US dollar index, source: Yihuitong)
At 10:47 Beijing time, the US dollar index is currently at 97.77.
The rebound in inflation appears to be related to rising food and energy costs, with some forecasts even pointing to a 2% month-on-month surge in gasoline prices. Therefore, inflationary pressures persist and consumers are likely to feel significant price increases when they pay the bills.
Focus on CPI
The real focus of the debate is the core CPI data - the indicator that excludes more volatile food and energy prices.
Analysts are currently divided into two forecast paths: one predicts a 0.3% month-over-month increase, keeping the annual rate around 3.1%. The other, more cautious group predicts a 0.4% jump—the largest increase since January and the second-highest in nearly two years. The tiny difference between 0.3% and 0.4% is more than just a numbers game; it could completely change the market's interpretation of inflation trends.
If the growth is 0.3%, it can still be called "sticky", but it may mean that prices are experiencing a tortuous and slow downward channel; while a 0.4% increase will clearly send a signal of inflation rebounding, which will shake the market consensus that "inflation is finally under control."
Inflation alarm escalates
The rise in inflation appears broadly distributed across a wide range of goods, rather than confined to a single sector. A rebound in core goods prices could push the monthly increase by around 0.25%, which would bring the annual rate to its highest level since May 2023. The main drivers are likely to come from categories such as new cars, apparel, sports equipment, and even mobile phones and tablets.
Meanwhile, market expectations for a slowdown in services inflation appear to be failing to materialize. Forecasts indicate that core services prices likely rose by approximately 0.30% month-over-month in August, with tourism-related services—particularly hotel charges—expected to see a strong increase of around 1%. This broad-based strength in both goods and services suggests that price pressures are no longer confined to specific sectors but may be more deeply rooted in the broader economy .
While the labor market remains the focus of current policy discussions, policymakers will undoubtedly keep a close eye on these inflation trends.
The Fed’s policy dilemma: a bumpy road ahead
The Fed's road ahead is expected to be bumpy. Concerns about its independence, deteriorating labor market conditions, and political drama will keep the Fed at the center of public opinion for the remainder of 2025.
For now, the labor market remains the focus, but inflation could play a larger role later this year if it starts to creep back up as tariffs take effect and businesses pass on costs to consumers.
Potential impact on the US dollar and interest rate cut expectations
The CPI report primarily drives the dollar through two channels: first, interest rate differentials—the difference between U.S. Treasury yields and those of other countries, which determines the direction of capital flows; and second, market expectations of Fed policy—investors' assessment of the probability of a rate hike or cut, which alters interest rate differentials. When CPI data alters market expectations of Fed action, it also alters the attractiveness of U.S. assets, thereby boosting or depressing the dollar.
If the CPI data shows a "hot" reading (e.g., core CPI reaching 0.4% or higher), it suggests stubborn inflation, potentially forcing the Federal Reserve to maintain or even intensify its tightening policy. This would lead to increased dollar positions, higher Treasury yields, and a strengthening of the US dollar index (DXY). Meanwhile, the stock market could come under pressure from rising financing costs.
Conversely, a "mild" CPI (core CPI ≤ 0.3%) indicates slowing price growth. Markets may shift to dovish expectations, believing the Federal Reserve will pause rate hikes or cut them sooner rather than later. Falling yield expectations diminish the dollar's appeal, typically leading to a decline in the dollar. While US Treasury yields tend to decline, riskier assets (such as stocks) may benefit from expectations of improved liquidity.
In short, the trend of the US dollar follows the transmission chain of "CPI data → expectation revision → interest rate reassessment → exchange rate adjustment" .
Possible scenarios based on the above logic:
Hot CPI (core ≥ 0.4%): USD strengthens against other currencies (DXY rises); US Treasury yields rise; stocks may come under pressure.
Moderate/neutral CPI (core ≤0.3%): The US dollar may be sold off; US Treasury yields fall; and the stock market may rebound.
If the CPI data is exactly in line with expectations (core CPI is exactly 0.3%), the market sometimes plays out the "buy the forecast, sell the facts" game. If investors have already priced in hawkish expectations, data that meets the consensus could actually trigger a technical correction in the US dollar, highlighting why the degree to which the actual data deviates from the market consensus is crucial.
In the current environment, the market has expected inflation to pick up slightly, which means that if the actual data is unexpectedly weak, the market may immediately reprice the probability of a 50 basis point interest rate cut on September 17, leading to a short-term sell-off of the US dollar, but this trend is difficult to sustain, and market sentiment tends to calm down after the data is fully digested.
US stocks have gained significant traction following their recent rally. Regardless of the CPI data, US stocks are expected to experience greater volatility than other asset classes . Positive data could bolster risk appetite, while negative figures could trigger profit-taking, creating a pattern of high two-way volatility.
(Daily chart of the US dollar index, source: Yihuitong)
At 10:47 Beijing time, the US dollar index is currently at 97.77.
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