The US July consumer price index, due later on August 12 will be parsed for clue on whether US President Trump's tariffs are impacting inflation at home, and to what extent, said several market participants, adding that this will directly influence monetary policy decisions of the Federal Reserve.
According to a Bloomberg survey of economists, the annual core inflation rate to rise to 3%, the highest since February. Read More
A Reuters poll of economists has said the core US CPI could likely rise by 0.3 percent in July, taking the annual rate to 3 percent, higher than the Fed's target of 2 percent inflation. A Goldman Sachs note recently said the core personal consumer expenditure index, a key metric for the US Fed to assess inflation, could hit 3.2 percent in December, from 208 percent in June.
The CPI helps the US Fed assess if inflation is on target, and if it needs to adjust rates accordingly. A higher-than-expected inflation could lead the Fed to keep interest rates higher for longer, in order to cool down the economy and control price rise. A rising inflation could impact corporate profits and consumer spend, which can affect the stock market.
Ross Mayfield, investment strategist at Baird Private Wealth Management told Reuters that the much-anticipated July CPI report will be crucial to the US Federal Reserve's decision on interest rates. "There's a lot riding on this because I think the Fed wants to cut [interest rates] now that we've had the weak jobs data," he said, adding, "If you see a significant uptick in inflation, and particularly in that kind of goods imports tariff adjacent inflation, there's going to be some anxiety at the Fed to cut as aggressively as I think the job market demands."
James Knightley, Chief International Economist with ING told CNBC-TV18 during a conversation on August 12 that the expectation is that the tariffs could push US inflation to 4 percent, but added that it might likely drop quickly after that. The latest US jobs data too has fuelled speculation of a potential Fed rate cut.
The US non-farm payroll additions for July stood at 73,000 with large downward revisions in May. This weakness in labour market has prompted anticipation of an increased chance of a reduction in September, with bets on a rate cut rising to more than 80 percent chance of a Fed rate cut in September, said Bloomberg.
"Markets expects two rate cuts in CY25 now, though the long-term rate expectation has moved upwards in past month due to fear of persistent tariff-led inflation," according to a SBI Capital Markets note. "The global impact of tariffs will uncoil itself in a rear-ended fashion through asset price volatility and delayed investments, once the carrying strength of the supply chain breaks down," the note feared.
A higher inflation can also erode the value of fixed-income investments such as bonds, which could impact their relative attractiveness.
While the US jobs data has been soft in July, global PMIs are at multi-month highs, helped by 'continuous delays' in tariff setting for manufacturing, said SBICaps, with services largely unafflicted.
"Market participants now will be definitely focusing on the upcoming Fed rate cut, which has been more or less priced in for September. If we start to see the core CPI data came in slightly below expected, that could actually further support this rate-cut expectations," Reuters said, quoting OANDA senior market analyst Kelvin Wong.
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