CPI inflation report preview: 2% in sight?

Key points

• July CPI inflation statistics will release at 8:30am EST on Wednesday, August 14th
• Headline inflation is expected to lower from 3.0% to 2.9% year over year; core inflation is forecasted at 3.2%
• June saw the lowest core inflation rate since April 2021
• June CPI had a -0.1% month-over-month dip, the first negative reading since May 2020; July expected to rise +0.2% MoM
• Lower inflation could lead to USD weakness as traders anticipate potential rate cuts from the Fed

When is the next CPI report?

July CPI inflation statistics will be released at 8:30am EST on Wednesday, August 14th. This release is highly anticipated by traders and economists as it provides critical insights into the inflation trajectory and potential monetary policy adjustments by the Federal Reserve. With no FOMC meeting in August, officials will also consider July PCE inflation statistics, slated for release at the end of August, to get a complete picture ahead of the first anticipated rate cut in September.

Headline inflation expected to lower into 2% range

Forecasts predict headline inflation will lower from 3.0% to 2.9% year over year, while core inflation is slightly higher at 3.3%, expected to be 3.2%. The Fed’s target is a flat 2% for both headline and core inflation. A reduction in these figures would be a positive sign, suggesting that inflationary pressures are diminishing, potentially paving the way for interest rate adjustments. However, even a minor deviation from expectations can cause significant market reactions.

Inflation hit 3-year low in June

Core inflation year-over-year, while higher than headline, is on a much steadier decline, with its most recent figure at its lowest since April 2021. Headline inflation is also at its lowest, having touched 3% in June 2023. At that time, core inflation was much higher at 4.8%, but now the two figures are more aligned. This alignment suggests a more balanced inflation scenario, which is crucial for long-term economic stability and market confidence.

June CPI also saw first MoM decline since 2020

June headline CPI dipped -0.1% month-over-month, marking the first negative reading since May 2020. While July is expected to see an uptick of +0.2% MoM, this contraction provides confidence that inflation is contained. This trend may indicate that inflation is stabilizing to a level that could satisfy the Fed's criteria for maintaining or adjusting interest rates, influencing investor and trader behavior in the forex markets.

Can low inflation reignite recession fears?

July employment data, which was more discouraging than expected with an unemployment rate of 4.3%, sparked fears that the Fed waited too long to cut rates, potentially leading to a recession. While markets initially overreacted to that news, a significant drop in inflation could fuel concerns about necessary emergency rate cuts ahead of the Fed's September meeting. However, as inflation is still above the Fed's target, there's some cushion before reaching a worrying level.

What will inflation data mean for US dollar?

Over the past few years, inflation data has been critical for gauging the possible interest rate landscape for the US. Traders and the Fed are now less worried about inflation, with imminent rate cuts seeming more contingent on employment figures. However, this reading could still help traders anticipate how much rates will fall and how soon. USD demand has been propped up by the yield from rates, so lower inflation could lead to USD weakness and vice versa.

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Trading forex requires an account with a forex provider like tastyfx. Many traders also watch major forex pairs like EUR/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.

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