A forthcoming report from the Bureau of Labor Statistics is estimated to reveal a rise in the Consumer Price Index, indicating that prices have risen by 2.9% over the past year. If proven accurate, this will mark the highest annual inflation rate since January. The core inflation, which omits fluctuating prices of food and energy, is also expected to have ascended by 3.1% annually, marking a persistent high since February.
This data indicates that inflation is not only surpassing the Federal Reserve’s target of a 2% annual rate, but it's also moving in an unfavorable direction. Economists attribute this trend to the tariffs President Donald Trump imposed earlier this year, which led to an increase in prices as business owners passed the cost of import taxes to their consumers.
Analysts are specifically interested in the effect of tariffs on a component of inflation dubbed as "core goods", which are purchased items excluding services, housing, food, and energy. Prices for these goods usually, prior to the pandemic, remained constant or negative due to the reduction in costs of items such as clothing and electronics by cheap imports. However, the cost of these core goods has been rising this summer, and this surge is expected to persist.
The anticipated inflation report stands to influence future interest rates and will surely draw the attention of Federal Reserve officials who will be convening later this month to decide on the central bank's monetary policy. Prevailing expectations in financial markets point towards the Federal Reserve cutting its benchmark interest rate for the first time this year during the meeting in September. This comes in light of the need to reduce costs on short-term loans to stimulate the economy and stifle an employment surge following this summer's hiring slowdown.
Fed officials must tread a fine line as an excessive dip in the benchmark interest rate, which stands between 4.25% and 4.5%, may provoke further inflation. Policymakers must calculate the adequate degree of reduced interest rates to achieve its 2% target inflation without igniting an inflation spike. The role of tariffs may complicate this balance as it applies inflationary pressure on goods amidst already sticky service inflation.
Future inflation data will shape the Federal Reserve's monetary strategy for the remainder of the year. The predominant expectation amongst financial markets, as suggested by the CME Group's FedWatch tool, is a 25 basis points cut in the key interest rate by the Federal Reserve in September, followed by two more quarter-point reductions by year's end.