The Fed will cut rates, but by how much? The all-important CPI report for August comes one week before the announcement, and has a critical role in shaping it. Gold, stocks and the US Dollar are set to rock. Live coverage.
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CPI inflation comes as investors fear a downturn
Headline inflation will likely fall to the lowest since 2021 – energy and food price rises have fallen. What matters for markets is the core Consumer Price Index (core CPI) which excludes these volatile items. Given the softer labor market, wage growth is also slowing, putting a lid on prices of services.
At current inflation levels of above the Federal Reserve's 2% target, a drop is a blessing. However, lower price rises may come to reflect a weak economy – as seen in China, which is experiencing deflation in producer prices.
The Federal Reserve is set to cut interest rates on September 18 – Fed Chair Jerome Powell clearly stated that. Nevertheless, uncertainty stems from the size of the cut – a standard 25 bps move or a double dose of 50 bps, which markets desire.
Lower inflation means a greater chance of a 50 bps cut, and that would boost Gold and stocks, while weighing on the US Dollar. Higher inflation would buoy the Greenback, while weighing on Gold and equities.
Core CPI MoM is the key figure to watch, and the economic calendar points to an increase of 0.2% in August, a repeat of July's figure.
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