US inflation data to set the tone for markets this week | investingLive

The US CPI report is the be all and end all for markets in trading this week. After the recent string of poor data, traders have gone on to price in a September rate cut as Fed policymakers also start to turn more dovishly. But what happens if inflation runs hotter than expected?

Stagflation risks are on the rise and this is now becoming the key buzzword that markets are turning to.

Looking at the numbers, headline inflation in July is expected to see a monthly increase of 0.2% (lower than 0.3% in June). However, the annual figure is still estimated to rise to 2.8% (up from 2.7% previously).

As for core inflation, the monthly figure is expected to increase by 0.3% (up from 0.2% in June) with the year-on-year estimate seen at 3.0% (up from 2.9% previously).

The core figures are obviously the more important element but the devil will still be in the details with the report. The key thing will be to watch out for any further tariffs passthrough from businesses to consumers. If there is more evidence of that, it will be a bit of an issue for the Fed.

But at this stage, I can see them pulling out a leaf out of the old playbook. The whole “inflation is transitory” framing a few years ago comes to mind and I imagine policymakers using that again to sell rate cuts towards the end of this year. The thinking would be that tariffs inflation would just bump up prices temporarily.

So, we’ll have to look forward to. But whatever the case is, stickier inflation numbers will just make the Fed’s job a whole lot tougher. And it will also keep markets on their toes before September.