The inflation report due this Friday is the last piece of the inflation puzzle the Federal Reserve can obtain before its interest rate decision next week. The Bureau of Labor Statistics will release the August Consumer Price Index (CPI) at 8:30 PM Beijing time on Friday. This data, combined with the Producer Price Index (PPI) released on Thursday, will help Fed officials predict the performance of the Personal Consumption Expenditures Price Index (PCE) at the end of September. The PCE is the Fed's most closely watched measure of inflation. This CPI reading will directly influence the Federal Open Market Committee's (FOMC) interest rate decision next Wednesday; even slight fluctuations in the inflation data could become a watershed moment for whether to maintain or raise interest rates.

Market consensus has been released, and core inflation and overall inflation are diverging.

According to the consensus forecast from the Dow Jones survey, prices for all goods and services rose 0.4% month-over-month in August, corresponding to a year-over-year inflation rate of 3.4%. Excluding volatile food and energy items, the core CPI is expected to rise 0.2% month-over-month and 2.4% year-over-year. While the overall CPI is more susceptible to short-term factors such as energy, the core CPI better reflects the underlying trend of US inflation and is a key indicator for the Federal Reserve's policy-making. The Producer Price Index (PPI), which measures changes in wholesale prices, was released on Thursday. This data reflects upstream cost pressures and can predict the future trend of downstream consumer goods prices. These two inflation data points corroborate each other, jointly outlining the current price situation in the US. Nomura Securities economists stated in a research report that the September FOMC decision ultimately depends on the CPI data, as most of the PCE price index's sub-items are derived from CPI statistics. The institution currently maintains its judgment that the Fed will not raise interest rates at its September meeting, but if the August CPI, especially the sub-items used to calculate the PCE, significantly exceeds expectations, the probability of tightening monetary policy next week will increase significantly.

Market expectations for interest rate hikes rose rapidly, with data and oil prices influencing trading sentiment.

Following Thursday's PPI data release, traders raised their expectations for a Federal Reserve rate hike. According to futures pricing on the CME Group's FedWatch tool, the probability of a 25 basis point rate hike climbed to 72% . However, market expectations are inherently volatile, fluctuating with economic data and energy price volatility, further increasing the importance of Friday's CPI data. Federal Reserve Chairman Kevin Warsh previously stated that he considers various market indicators when formulating monetary policy. At the beginning of the month, the September interest rate game was evenly matched, but the sharp rise in energy prices in September began to gradually shift the market balance. Bill Adams, chief US economist at 53 Commercial Bank, said that at the beginning of the month, the two sides of the Fed's September decision were similarly likely, but the surge in energy prices in September would likely push the Fed to choose to raise rates at next week's meeting. He also cautioned that if the upcoming August CPI data shows a significantly unexpected result, or if the US and Iran reach an agreement at the last minute, it could still change the course of this interest rate decision. Rising energy prices will directly push up overall inflation and exacerbate market concerns about inflation stickiness, prompting the Federal Reserve to consider further tightening monetary policy.

How Inflation Data Affects the Federal Reserve's Policy Path and Global Assets

Even subtle differences in the CPI can directly alter the voting inclinations of the Federal Open Market Committee (FOMC). If core CPI is higher than expected, committee members will determine that the decline in inflation is stalled and choose to raise interest rates to suppress prices; if the data is lower than expected, they will support maintaining the current interest rate, waiting for the previously high interest rates to gradually cool down. The Fed's policy choices will quickly transmit to major global asset classes such as US Treasuries, the US dollar, and gold. Rising expectations of interest rate hikes typically push up US Treasury yields, boost the US dollar, and are bearish for gold; conversely, if inflation falls short of expectations, expectations of interest rate hikes cool down, long-term bond yields are likely to fall, and safe-haven assets such as gold will receive support. It is worth noting that current market expectations are highly volatile, and energy prices and geopolitical situations are external variables that can change the Fed's decision-making considerations at any time. This means that even if the CPI meets expectations, sudden geopolitical events could still disrupt the Fed's established policy pace.

Conclusion

The August CPI is the last major inflation report before the Federal Reserve's September policy meeting, and even slight discrepancies in the data can alter the outcome of an interest rate hike. The market currently prices in a probability of a rate hike exceeding 73%, with rising energy prices clearly supporting a rate increase. However, institutions like Nomura Securities warn that only a stronger-than-expected increase in the data would truly trigger policy tightening. Global investors are awaiting the release of this CPI data, as it will not only determine the short-term direction of US monetary policy but also influence the pricing logic of US Treasury bonds, exchange rates, and commodities. Continuous monitoring of the statements from Federal Reserve officials and the resulting changes in asset prices after the data release is crucial.