On Wednesday, investors will focus on a key economic indicator that could influence future Federal Reserve interest rate decisions: the Consumer Price Index (CPI) for July.
Scheduled for release at 8:30 a.m. ET, the report is anticipated to show headline inflation holding steady at 3.0%, matching June's figure.
Consumer prices are projected to have increased by 0.2% over the past month, a slight rise from June's 0.1% decline, primarily driven by a rebound in energy prices.
When excluding the more volatile components of food and gas, the "core" CPI is expected to show a 3.2% increase from the previous year, a slight deceleration from June's 3.3% annual rise. However, monthly core prices are expected to rise by 0.2%, up from a 0.1% increase in June, according to Bloomberg data.
"June's CPI surprised on the downside," wrote Bank of America economist Michael Gapen in a note ahead of the release. "We expect some of that surprise to reverse in July."
June's data marked the first time since May 2020 that the monthly headline CPI registered a negative reading. It also represented the slowest annual price increase since March 2021.
While July's inflation figures may not be as low as June's, they align with the recent trend of easing inflation and could meet the Federal Reserve's criteria for initiating rate cuts in September, according to Gapen.
Core inflation has remained persistently high due to rising costs in shelter and core services such as insurance and medical care.
Shelter prices, in particular, are expected to bounce back after a slowdown in June, with the index for rent and owners' equivalent rent (OER) posting their smallest monthly increases since August 2021. Owners' equivalent rent represents the hypothetical rent a homeowner would pay for their property.
Non-housing services also saw a decline in June, largely driven by a significant drop in airfares. However, Gapen expects a more moderate decline in airfares for July.
"Non-housing services inflation should gradually ease given the cooling in service-sector wages, though a sustained period of deflation seems unlikely," Gapen cautioned.
The Debate on Rate Cuts
Ahead of Wednesday's CPI release, the Producer Price Index (PPI) for July came in cooler than expected, fueling investor optimism and bolstering the case for Federal Reserve rate cuts. U.S. producer prices, a key indicator of wholesale inflation and a predictor of future consumer prices, rose by just 0.1% month-over-month in July, following a 0.2% increase in June.
This pace was below economist expectations. The index rose 2.2% year-over-year, slightly above the Federal Reserve's 2% inflation target.
"This is positive for equities," said John Stoltzfus, chief investment strategist at Oppenheimer, in an interview with Yahoo Finance's Morning Brief. "It eases some of the negative sentiment that had gripped the market earlier this month. We believe this opens the door for the Federal Reserve to start cutting rates."
Although inflation remains above the Federal Reserve's 2% target on an annual basis, recent economic data, including a weaker-than-expected July jobs report, has strengthened the argument for rate cuts sooner rather than later.
Notably, the Fed's preferred inflation gauge, the core Personal Consumption Expenditures (PCE) price index, remained unchanged in June from the previous month, marking the slowest annual increase in core PCE in over three years.
As of Tuesday, markets were nearly certain that the Federal Reserve would cut interest rates by the end of its September meeting. However, opinions are now evenly split on whether the cut will be 50 basis points or 25 basis points, according to the CME FedWatch Tool.