On Thursday, investors will be closely watching for one of the most important data points the Federal Reserve will consider in its next interest rate decision: July’s Consumer Price Index (CPI).
The report, set for release at 8:30 a.m. ET, is expected to show headline inflation of 3.3%, an acceleration compared with June’s 3% annual gain in prices, according to estimates from Bloomberg.
A 3.3% increase over the prior year would mark the slowest annual increase in consumer prices since March 2021. Over the prior month, consumer prices are expected to have risen 0.2% in July, in line with the monthly increase seen in June.
On a “core” basis, which strips out the more volatile costs of food and gas, prices in July are expected to have risen 0.2% over the prior month and 4.7% over last year, according to Bloomberg data.
Inflation has remained significantly above the Federal Reserve’s 2% target. That, along with a labor market that Fed Chair Jerome Powell has described as “very tight,” suggests the Federal Reserve will continue to raise interest rates later this year. But prior to the report, markets were widely expecting the central bank to pause its hikes at its meeting next month.
Read more: What the Fed rate hike means for bank accounts, CDs, loans and credit cards
As of Monday afternoon, markets were pricing in a roughly 85% chance the Federal Reserve keeps rates unchanged at its Sept. 20 policy meeting, according to data from the CME Group.
The central bank raised rates by another 0.25% in July after pausing its aggressive rate-hiking cycle in June.
‘The building narrative of a soft landing’
Economists have largely predicted a “soft landing” in the US given the resiliency of the economy.
“July CPI data this week is unlikely to challenge the building narrative of a soft landing,” Citi Research analyst Veronica Clark wrote in a note on Tuesday.
Citi expects core CPI to be modestly stronger last month compared with the prior month’s reading, explaining the large price declines in airline fares, which fell 8.1% in June, are unlikely to repeat.
Used car prices are expected to have fallen further last month, after dropping 5.2% year-over-year in June.
Shelter prices, however, may rise at a similar rate as June before slowing in the subsequent months, Citi said. The shelter index jumped 7.8% annually in June and 0.4% on a seasonally adjusted month-over-month basis.
Goldman Sachs analyst Jan Hatzius added, “Going forward, we expect monthly core CPI inflation to remain in the 0.2-0.3% range in the next few months, reflecting continued moderation in shelter inflation, lower used car prices, and slower non-housing services inflation as labor demand continues to moderate.”
Still, some economists say economic resiliency is unlikely to last in the face of high interest rates.
“There is much uncertainty about how much rate rises affect output, with good reasons for thinking that the full impact of monetary tightening is yet to be felt, especially via money and credit channels,” Oxford Economics lead economist Adam Slater wrote in a note on Wednesday.
Oxford expects growth in advanced economies like the US to slip into negative territory at the end of 2023 or early 2024.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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Source: finance.yahoo.com