US CPI Preview: Are we past peak inflation?

Price pressure may show slowing down while the Fed’s preferred Core CPI measure shows that underlying inflation is still rising.

Tomorrow the US Bureau of Labor Statistics will release the July Consumer Price Index report.

Economists are expecting CPI headline to come in at 0.2% MoM , 8.8% YoY, with the core CPI report expected to print at 0.5% MoM, 6.1% YoY. Last month’s headline CPI printed 9.1% YoY, while the core CPI was 5.9%.

The biggest factor could be the gas prices, which have now fallen for over 50 days straight. Analysists estimated that the gas prices fell at least 10% in July from June levels, likely subtracting 0.5% or more off the headline CPI reading this month. Food prices were also lower to some extent in July than August, setting up a dynamic where the headline inflation reading may show price pressures fading while the Fed’s preferred “core” CPI measure shows that underlying inflation is still rising as home prices and pent-up demand for economic reopening offset the more volatile components.

It is expected that if the inflation comes in hotter than expected, it would tip the odds in favor of another 75bps interest rate hike from Fed next month and it is likely to boost USD. A break above the 107.00 handle in that scenario could open the door for a potential retest of the dollar index’s June highs near 109.00. Meanwhile, a soft CPI report could weigh on the buck, with a move below the dollar index’s 50-day EMA near 105.50 suggesting that a deeper pullback toward 104.00 is possible.