Tuesday’s CPI report is likely to show that inflation remains hot, putting the Fed in a difficult spot

Tuesday’s report on the consumer price index could set the tone for markets ahead of next week’s Federal Reserve meeting, especially if it’s warmer than expected.

The CPI is expected to rise 0.4% in August when it is released at 8:30 a.m. ET, according to the Dow Jones consensus estimate. Year-on-year, the CPI would increase by 5.4%, at the same rate as in July. Excluding food and energy, the CPI is expected to rise by 0.3% or 4.2% year-on-year, according to estimates.

Inflation data has come in stronger than expected, which worries it may be more persistent than Fed officials believe. The Fed is meeting next Tuesday and Wednesday and is expected to discuss reducing its bond program, but will not formally announce its plans until the end of the year.

But some market professionals say another warning about rising inflation could speed up the Fed’s timetable, even though the August employment report was weaker than expected. Some market professionals lowered their expectations for a Fed announcement after August employment gains reached just 235,000, about 500,000 less than expected.

“If inflation is hot, that would imply a slightly faster timeline on the part of the Fed,” said Ben Jeffery, U.S. strategist at BMO. He said he would expect a higher pace than expected to raise interest rates.

David Donabedian, U.S. investment director at CIBC Private Wealth, said a higher number could be a concern for stocks and send higher bond yields. Yields move at an opposite price.

The CIO said the market will focus closely on which components of the CPI show higher inflation rates.

Donabedian said he is monitoring whether temporary sources of COVID-related inflation, such as hotels and air fares, began to decline or whether inflation was due to supply shortages. He said it now looks like supply chain problems are more serious than they seemed until just three months ago and expects inflation to remain a problem.

“Certainly the trend has been for the number of inflation to exceed expectations. I think if that happens again, it will fuel this narrative that high inflation will stay longer than the Fed had been planning,” he said. .

Donabedian said he expects there to be about one in four chances that a hot CPI number could cause the Fed to move earlier to announce the volume reduction. He said he is watching to see if things will appear that could be more persistent, such as rising rents.

“The Fed continues to say it sees inflation as transitory. Still, inflation data is getting worse than better,” said Sam Stovall, CFRA’s chief investment strategist. “If it’s hotter than expected, I think the stock market will continue to be soft. I think investors are trying to decide if there’s more concern than not.”

Shares rose slightly on Monday after five days of losses for the Dow Jones Industrial Average, partly related to inflation concerns.

Some Fed officials in recent weeks have said they believe the central bank should start recovering its $ 120,000 monthly bond purchases sooner rather than later. But Fed Chairman Jerome Powell has said he wants to see stronger reports on employment before the volume cut is announced.

Stovall said he does not expect a formal announcement until November. The Fed’s move away from the bond-buying program would be its first major step toward its easy policy and ultimately lays the groundwork for interest rate hikes.

“If we end up with a stronger-than-expected main and core CPI, I think I’m sure statements will be made about inflation, although it may not force them to say anything about reducing the weather sooner,” Stovall said.