Key Takeaways
The Consumer Price Index (CPI) is set for release on Wednesday, with expectations of a slight month-over-month increase, though inflation remains well above the Federal Reserve's 2% target.
Following weaker employment data, a moderate inflation reading could give the Fed more room to pause and delay further rate hikes for now.
Economists forecast: headline CPI up 0.2% month-over-month, with the annual rate easing to 3.4%; core CPI up 0.1% month-over-month, with an annual rate of 2.5%.
Where to start
On August 8, 2026, in Wilmington, North Carolina, a shopper selects fresh produce at a grocery store. Global food prices surged to a three-year high in July, driven by adverse weather in major grain-producing regions and renewed concerns over key export routes for cereals.
The highly anticipated inflation report due Wednesday could provide the Federal Reserve with some breathing room in its fight against rising prices. The U.S. Bureau of Labor Statistics will release the CPI at 8:30 a.m. Eastern Time. A Dow Jones survey of economists shows consensus expectations: headline CPI rose 0.1% month-over-month in July; the closely watched core CPI, which excludes volatile food and energy costs, increased 0.2% month-over-month. On an annual basis, headline CPI is expected at 3.4%, and core CPI at 2.5%, both down 0.1 percentage point from June.
While year-over-year inflation remains significantly above the Fed's 2% target, two consecutive months of moderate monthly declines could create conditions for the Federal Open Market Committee to hold off on raising interest rates.
Why just 10 ASX 200 shares?
RSM Chief Economist Joe Brusuelas said, "If the July CPI aligns closely with my forecast, most committee members will downplay the impact of the current supply shock, and the FOMC will likely keep rates unchanged for the remainder of the year." He added that the data could provide some support for Fed Chair Kevin Warsh, who has faced persistent policy challenges since taking office in May.
At its July meeting, the FOMC voted 9-3 to hold the benchmark interest rate steady at 3.5%–3.75%. All three dissenting members favored a 25-basis-point rate hike. Fed Governor Lisa Cook recently indicated she would also support a rate increase if inflation data continues to worsen.
However, recent economic data has shown signs of cooling, and repeated easing of tensions in the Middle East have led to a repricing of market rate-cut expectations. The CME FedWatch Tool shows traders see only a 50-50 chance of a rate hike in September, with a greater likelihood of an increase in October or December.
The policy decision window
Before the Fed's next meeting, policymakers will have both July and August inflation reports in hand. There is no FOMC meeting in August, but the Kansas City Fed will host its annual global central banking symposium in Jackson Hole, Wyoming.
Brusuelas noted, "If you're not confused, you haven't been paying close attention. That saying perfectly sums up the market environment in mid-August."
June's inflation data showed a temporary improvement: headline CPI fell 0.4% month-over-month, while core CPI was flat, driven by lower energy prices and cooling housing costs. Meanwhile, the employment report released last Friday showed that nonfarm payrolls decreased by 23,000 in July, but the unemployment rate fell to 4.1%.
Even with signs of a weakening labor market, some economists remain cautious about upside risks to July's inflation data or the potential for inflation stickiness to persist beyond the Fed's tolerance.
For example, Bank of America still forecasts three rate hikes in the coming months. BofA economists wrote in a client note, "The July employment report hasn't changed the overall labor market landscape—it remains stable. More importantly, recent Fed officials' comments indicate that the Fed's policy decisions are highly dependent on inflation data."
BofA pointed out that if the Fed's core inflation measure averages a 0.25% month-over-month increase over the next two months, the Fed is almost certain to begin raising rates in September. Conversely, if the average is below 0.2%, a rate hike would be delayed. If it falls between these levels, the chances of a September hike are about even. The final decision will rest with Warsh, and the market will need to gauge which of two recent signals best represents his policy leanings: reports suggesting he is "willing to raise rates if necessary," or the more dovish stance he took at the July press conference.
If inflation data picks up again, Warsh may face calls from the committee for more than just one rate hike. The Fed rarely adjusts its interest rate policy just once.
One of the three dissenters at the June meeting, Cleveland Fed President Beth Hammack, said Monday that multiple rate hikes are likely necessary. In an interview with Yahoo Finance, she stated, "I can't predict the terminal rate. In general, a single 25-basis-point rate hike is unlikely to significantly change the economic landscape, so it's likely that multiple consecutive adjustments will be needed, but I don't want to prejudge the number. The labor market is currently stable, and I am fully committed to bringing inflation back to target."
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