The Fed’s rate cut next week is a foregone conclusion—can tonight’s CPI open the door to a 50-basis-point move?
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Over the past two weeks, a series of dovish economic data has paved the way for a Fed rate cut—from Powell’s dovish turn in Jackson Hole, to last Friday’s weak non-farm payrolls report, then to this week’s revision down of 911,000 jobs, as well as PPI data moving into deflation. A Fed rate cut next week is now a “sure thing”, and tonight’s August CPI inflation report will determine whether the cut is 25 or 50 basis points.
At 20:30 Beijing time on Thursday night, the US will release the August Consumer Price Index (CPI),and Wall Street generally expects August inflation to rebound due to tariffs. Specifically:
The US August headline CPI is expected to rebound to 0.3% month-over-month, higher than last month’s 0.2%, and the year-over-year rate is expected to accelerate from 2.7% to 2.9%;
However, core CPI growth is expected to remain unchanged, with core CPI flat at 0.3% MoM and steady at 3.1% YoY.
Investment bank analysis is divided. Goldman Sachs expects August core CPI to rise 0.36%, slightly above market consensus, reflecting upward pressure from tariffs, car prices, and airfare. JPMorgan also predicts CPI will rise 0.4%, the strongest monthly gain since last December. Both banks note that the impact of tariffs is starting to appear, and companies will face more direct cost pressure after inventory is depleted.
A Fed rate cut next week is now “locked in.” According to the Fedwatch tool, the probability of a 25bp cut is now at 92%, and a 50bp cut is at 8%. But if inflation unexpectedly weakens, the chance of a 50bp cut will rise significantly. JPMorgan analyst Andrew Tyler says Powell’s speech has secured a 25bp cut in September, but unexpectedly dovish data could raise expectations for a 50bp cut.
In terms of market reaction, the options market shows that the implied volatility of the S&P 500 index during CPI day is only 58 basis points, the lowest level so far this year. Morgan Stanley analysis says there is a potential 0.06 standard deviation upside for CPI, which could push the dollar index up 0.03% within an hour after the data release.
Tariffs and Seasonal Factors May Drive Inflation Rebound
Due to rising gasoline costs and increased prices for some goods from tariffs, the US August CPI could rise again.
Economists expect CPI may be pushed up by both rising gasoline prices and tariffs increasing the price of goods. Coffee prices have reached the largest annual jump in two and a half years, and beef prices have soared due to import tariffs and earlier drought effects.
Goldman Sachs focuses on four key components in its CPI forecast: used car prices are expected to rise 1.2%, reflecting higher auction prices; auto insurance costs are expected to rise 0.4%, continuing the trend of insurers passing on costs to consumers; airfares are expected to surge 3%, driven by seasonal distortions and rising base fares.
Of these, the most noteworthy is the impact of tariffs. Goldman Sachs expects tariffs to add 0.14 percentage points upward pressure to core inflation, covering categories such as furniture, auto parts, clothing, and entertainment goods. The bank notes that August and September are peak periods for expected tariff pass-through. After companies exhaust pre-tariff inventory, they’ll start selling goods that factor in tariff costs.
Stephen Stanley, Chief Economist at Santander US Capital Markets, believes the evidence is overwhelming that more tariff-driven inflation is coming, although full pass-through may take a few more months. Citi economist Veronica Clark points out that autumn is usually a natural time for companies to raise prices. Data over the next few months will be an effective test of tariff-related price hikes. If goods prices stay modest, it may indicate weak consumer demand is limiting companies’ ability to raise prices.
Samuel Tombs, Chief Economist at Pantheon Macroeconomics, notes that CPI’s response to tariffs has so far been slow, partly because distributors have been selling pre-tariff-imported goods. But wholesale and worker inventories are only equivalent to 1.3 months’ tax, indicating that companies are now starting to sell goods that bear tariff costs.
25bp or 50bp Rate Cut?
The market has now fully priced in a 25bp rate cut, and the focus is on possible adjustments to the size of the cut. JPMorgan’s market intelligence department believes there’s insufficient risk to force the Fed to pause in September, but a significant hawkish data surprise could affect policy responses at the October and December meetings.
Goldman Sachs trader Paolo Schiavone highlights in the inflation preview that the key is to distinguish noise from underlying trends. Of the bank’s forecasted 0.36% core CPI gain, 14bp comes from tariffs. Excluding tariff effects, US core inflation would be at an annualized rate of about 2%, implying the Fed should have already started more aggressive rate cuts.
Barclays has revised its forecast and now expects three 25bp Fed rate cuts this year, and another two in 2026. This reflects the market’s policy focus shifting from fighting inflation to addressing potential economic slowdown. CPI swap rates currently project August CPI YoY at 2.91%, MoM at 0.38%, both slightly above economist consensus.
Schiavone points out that triggering a 50bp cut would require future average non-farm payrolls to be below trend by 10,000 jobs—a level that would weigh on risk assets. If the labor market does not cause concern and real-time data stabilizes, combined with stable wages for workers, market risk remains skewed to the upside.
How Will Markets React?
JPMorgan has developed detailed market reaction scenarios for different CPI outcomes:
There’s a 35% chance core CPI MoM falls in the 0.30%-0.35% range, corresponding to an S&P 500 index move of down 25bp to up 50bp.
If the data beats expectations, MoM rises 0.25%-0.30%, the index could rise 1%-1.5%;
If it surprisingly drops below 0.25%, a 1.25%-1.75% increase is possible.
If core CPI MoM exceeds 0.4%, the S&P 500 index could fall 1.5%-2%, but the bank thinks such an extreme scenario has only a 5% probability.
Goldman Sachs notes that options market pricing shows investors have little concern for inflation data causing major market turbulence, with implied volatility at a yearly low of 58bp.
Goldman makes specific forecasts for the market impact on each asset class. For Treasuries, it recommends downplaying knee-jerk selloffs caused by high inflation data, given the artificial nature of the tariff contribution; in the medium term, the yield curve should bull-steepen as cuts take effect; for the dollar, inflation-driven upside is limited as the Fed’s tolerance for tariff-driven inflation narrows the difference from other central banks.
Risk assets overall face a supportive inflation backdrop—mid-term inflation risks are lower, and the Fed’s inclination toward easing is supportive for risk assets. The bank reminds that there are three remaining non-farm payroll releases this year: October 3, November 7, and December 5, which will be key windows to observe the labor market and policy trajectory.
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