Tomorrow at 1.30pm UK time, the US publishes it's July CPI print, and it is the first of only two consumer price readings the Federal Reserve will see before it decides on rates on 16 September.
The stakes were set on Friday. A jobs report showing the US economy lost 23,000 positions in July, against forecasts for a gain of 80,000, knocked the market's September hike pricing from 57 percent to the low 40s. It has since climbed back to roughly 52 percent, and the reason is on the oil screen: Brent has rallied from around 82 dollars on Friday to above 89 this morning, putting the inflation pressure that started this argument back on the table before the data even lands. With Chair Kevin Warsh offering no forward guidance, the tape is doing the pricing on its own, and tomorrow the argument moves from the labour market back to prices.
What Is Expected
The consensus looks tame. Headline prices are forecast to rise 0.1 percent on the month, after June's 0.4 percent fall, the first monthly decline in six years. Core inflation, which strips out food and energy, is expected up 0.2 percent, taking the annual rate to around 2.5 percent from 2.6, its smallest rise since February.
Inside the report, energy should be cooling. Petrol prices hit a near four-month low in early July before climbing back late in the month, and airfares are expected to ease as jet fuel settled. That is July's story, and crude has already moved on from it. Which sharpens the real question: with the energy shock washing out of the monthly numbers even as it rebuilds on the screen, what is everything else doing?
What People Think
Opinion is genuinely split, and both camps will find their number tomorrow.
The hawks point to consumer prices still 3.5 percent higher than a year ago, a fifth consecutive year above the 2 percent target, and three Fed policymakers who voted for an immediate hike in July. Strategists at J.P. Morgan's wealth arm moved their base case to a September rise earlier this month, arguing that doubts about the Fed's inflation-fighting credibility after the July meeting have "lowered the bar" for a hike, though they note a run of cooler inflation data could remove the need for one.
The other side, including Bloomberg's economists, argues the annual pace of core inflation is heading for its lowest since early 2021, which undercuts the case for drastic action.
Our view is that the annual number deserves less weight than it will get. It is a twelve-month average, and right now that window still contains months from before the war. Tomorrow shows the mechanics in miniature: last July's core print was 0.3 percent, lifted by tariff pass-through, and that month now drops out of the window. Replace it with the 0.2 percent expected tomorrow and the annual rate falls from 2.6 to 2.5 without underlying inflation cooling at all. The decline is the calendar, not the economy. The annual rate measures the world before the shock. The monthly pace measures the world after it, and that is where tomorrow's information is.
How Markets Are Likely to React
A core reading of 0.3 percent or higher would suggest the oil shock is embedding in the wider economy, with underlying prices running even as July's energy components cool. September's odds would rebuild quickly, lifting the dollar and front-end yields. At the consensus 0.2 percent or below, the report would ease fears that the inflation is embedding and give Warsh room to hold, leaving the dollar under pressure, with sterling and the euro the likely gainers. With the hike priced at a coin flip and crude climbing again, tomorrow's number breaks the tie.
For businesses with dollar exposure, the practical point is that this is a scheduled, known event that can move the rate sharply in either direction within minutes of 1.30pm. Two inflation prints decide September. This is the first. If you would like to talk through how to approach it, please speak to the Lamera Capital dealing team.