CPI today: why the headline number may not be the one to watch

Today’s US inflation report could well look hot on the surface. Economists expect consumer prices to have risen 0.4% in August, four times July’s pace. That may sound alarming, but much of the jump is expected to come from petrol.

The number that could decide whether the Federal Reserve (Fed) raises rates next week sits further down the report. It’s due at 12:30 UTC, five days before the Fed’s decision on 16 September.

Two numbers, one report

The Consumer Price Index (CPI) measures how much the prices of everyday goods and services changed over the month. It comes with two main readings.

Headline CPI covers the whole basket, including food and energy. Core CPI strips those two out, because they can swing sharply with weather, wars and supply shocks. Core is often seen as a better guide to whether inflation is settling into the wider economy.

This month, the two could tell quite different stories.

Before the Iran war began in late February, headline and core inflation were almost level, at 2.4% and 2.5%. Since then, higher energy prices have pushed headline well above core. Today’s report could potentially widen that gap again.

How oil gets into the shopping bill

Renewed attacks on shipping near the Strait of Hormuz have pushed oil back above $100 a barrel, its highest since May. That tends to feed through in stages:

• Petrol comes first. Wells Fargo estimates prices at the pump rose a little over 4% in August, which is a big part of why headline CPI is expected to jump.
• Businesses come next. Thursday’s Producer Price Index (PPI) showed wholesale energy prices up 4.2% in a single month, with producer prices up 5.4% on the year.
• Everything else could follow. Companies facing higher fuel and delivery costs can absorb them or pass them on. Airline fares and freight costs already rose in the producer data.

That last stage is what core CPI picks up. It’s also the part Fed Chairman Kevin Warsh has focused on, since he’s said the Fed needs to be confident underlying inflation is moving back to target.

What’s expected

• Headline: 0.4% on the month, 3.3% to 3.4% on the year
• Core: 0.2% on the month, 2.4% on the year

The yearly headline may barely move despite the bigger monthly rise, because prices also rose 0.4% last August.

The detail that could matter most is this. Some forecasts, including Wells Fargo’s, put core at around 0.22% to 0.23%. That rounds down to 0.2%, but only just. A small push from rent or airfares could tip it to 0.3%, and that tenth of a point may be where today’s reaction is decided.

Why the Fed is so sensitive right now

Before Jackson Hole in late August, the odds of a September hike sat at roughly one in three. Since then:

• Warsh said this summer’s better than expected inflation readings didn’t show that underlying trends had meaningfully improved.
• August payrolls came in at 162,000 against 53,000 expected, which could weaken the argument that the jobs market needs support.
• Producer prices rose faster than expected on the yearly measure, although core producer prices came in softer.

Hike odds now sit around 71% on CME FedWatch, up from the low 60s before Thursday’s producer price data. Fed Governor Christopher Waller has said stubborn inflation would push him to consider a hike, though he’d otherwise prefer to hold. Much of the case for a hike appears to be in place. Today’s report could either strengthen it or leave room for doubt.

Where Bitcoin and gold come in

Higher rates tend to make the US dollar more attractive to hold and push bond yields up. Gold (XAU) and Bitcoin (BTC) don’t pay interest, so they can lose appeal when cash and bonds pay more. That’s why a US price report can move crypto within seconds.

Going in, Bitcoin is around $77,000, down from last week’s high near $82,000. Gold is near $4,340 and on track for a third straight weekly decline. The US 10 year bond yield is around 4.95%, close to its highest since October 2023.

Markets tend to react to surprises rather than the numbers themselves. With a hike already around [71%] priced in, a hot core could still push odds higher, but a soft one may catch more people off guard.

What different readings could mean

• Core at 0.3% or higher could suggest energy costs are spreading into other prices. Hike odds could rise further, and the conversation may shift from whether the Fed hikes to whether it hikes more than once. That could lift the dollar and yields and weigh on gold and Bitcoin.
• Core at 0.2% would be in line with forecasts and could suggest the jump is mostly petrol. Some economists say a reading like that could ease pressure for a September hike.
• Core at 0.1% or lower could suggest underlying inflation is cooling. Hike odds could fall sharply, potentially supporting gold and Bitcoin, and next Wednesday’s decision could become a genuine close call.

Whichever way it lands, the half hour after 12:30 UTC could be volatile, with wider spreads and early moves that may reverse quickly.