What To Expect From Tomorrow’s CPI Inflation Report

Tariffs continued to push up prices and squeeze household budgets in August, if forecasters are right about this week’s highly anticipated inflation report.

A report from the Bureau of Labor Statistics Thursday is expected to show prices, as measured by the Consumer Price Index, rose 2.9% over 12 months in August, up from 2.7% in July, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal. That would mark the highest annual inflation rate since January.

Core Goods Are Key

“Core” inflation, which excludes volatile prices for food and energy, is expected to have climbed 3.1% over 12 months, the same rate as in July, and tied for the highest since February.

Should the report match expectations, the data will show that inflation remains above the Federal Reserve’s target of a 2% annual rate, and is headed in the wrong direction. President Donald Trump’s tariffs, implemented earlier in the year, have raised prices as merchants pass the costs of the import taxes on to their customers.

Economists are looking for the impact of tariffs in a category of inflation called “core goods,” which measures the things people buy as opposed to services and housing. The category also excludes prices for food and energy, which can fluctuate for reasons other than inflation trends. In pre-pandemic times, prices for core goods were often flat or negative, since cheap imports pushed down the cost of things like clothes and electronics, keeping overall inflation in check. But this summer, the prices for core goods have increased, a trend that forecasters expect to continue.

“We will mainly be looking for continued signs of tariff impacts in core goods categories,” Brett Ryan, senior U.S. economist at Deutsche Bank, wrote in a commentary.

How The Fed Reacts

The inflation report will almost certainly affect the outlook for interest rates, and will be closely watched by Fed officials who are meeting later this month to set the central bank’s monetary policy.

Financial markets widely expect the Fed to cut its benchmark interest rate for the first time this year at its September meeting. It aims to lower costs on short-term loans in an effort to boost the economy and prevent this summer’s hiring slowdown from turning into an unemployment surge. The Fed is tasked by Congress with keeping inflation low and employment high.

Fed officials may be reluctant to cut the benchmark interest rate too far from its current range of 4.25% to 4.5%. The rate is elevated because Fed officials want to discourage borrowing and spending enough to push inflation down to its 2% target. Policymakers may worry that lowering interest rates too much too quickly will stoke more inflation, which hasn’t been at or below 2% since 2021.

“The combination of tariff-induced inflationary pressures on goods and relatively sticky service inflation are likely to result in policymakers remaining cautious about inflation risks,” David Seif, chief economist for developed markets at Nomura, wrote in a commentary.

Inflation data in the coming months will guide the Fed’s strategy for the rest of the year.

Financial markets widely expect the Fed to cut its key interest rate by 25 basis points in September, and to follow up with two more quarter-point cuts by the end of the year, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.