The upcoming CPI inflation report on Wednesday may prompt a shift in the Fed's perspective.

• According to a survey by Dow Jones, economists predict that the consumer price index, which will be released on Wednesday at 8:30 a.m. ET, will show an increase of 0.2% for both the all-items reading and the core measurement.
• If the CPI reading is positive, the Federal Reserve may focus on addressing other economic issues, including the sluggish job market.
• Jim Baird, chief investment officer at Plante Moran Financial Advisors, stated that inflation is almost a nonissue at this point and there's a broad expectation that the worst is easily behind us.

On Tuesday, inflation news was positive, and investors are optimistic that it will improve further on Wednesday with the release of the July consumer price index report by the Labor Department.

If the CPI reading is positive, it could indicate that the early-year price increase was a fluke or the final surge of inflation. This would allow the Federal Reserve to focus on other economic issues, such as the slowing job market.

"The inflationary pressure that we observed has been significantly reduced, and inflation is now almost a non-issue," stated Jim Baird, chief investment officer at Plante Moran Financial Advisors. "There is a broad expectation that the worst is over and behind us."

The Fed is expected to shift its focus from tight policy to tackle inflation to a somewhat easier stance in September, like other investors on Wall Street, to prevent a potential weakening in the jobs picture.

Despite ongoing concerns about high prices, recent data suggests that the trend has shifted, as evidenced by Tuesday's producer price index (PPI) report for July, which indicates that the elevated inflation numbers that began in 2021 and spiked again in early 2024 are now in the past.

The PPI report, which serves as a benchmark for wholesale inflation, revealed a 0.2% increase in prices in July and a 2.2% rise from the previous year. This figure is now close to the Fed's 2% target, suggesting that the market's push for the central bank to reduce interest rates is on track.

According to a survey by Dow Jones, economists expect the Consumer Price Index (CPI) to increase by 0.2% for both the all-items reading and the core measurement that excludes food and energy. However, the 12-month rates are projected to be 3% and 3.2%, respectively, which are below their mid-2022 highs but still far from the Federal Reserve's 2% target.

The Sahm Rule has been triggered due to the 0.8 percentage point increase in the unemployment rate from 3.5% to 4.3% over the past year, prompting investors to expect the Fed to start cutting interest rates at its September meeting.

"If inflation continues to decrease rapidly and the labor market weakens, it is likely that the Fed will begin to ease quickly, possibly at the September meeting. If they do not, the market may not react positively."

Worries over slow Fed response

Some market analysts considered an emergency rate cut after a slight increase in weekly initial unemployment claims and other economic indicators.

The worry about the Fed being slow to ease, just as it was slow to tighten when inflation began to escalate, still persists despite the dissipation of that sentiment.

The Fed is now confident that they can shift their focus from inflation to labor, as stated by Tom Porcelli, chief U.S. economist at PGIM Fixed Inflation. However, Porcelli believes that the Fed could have shifted their attention from inflation to labor months ago, as there are cracks forming in the labor market backdrop.

The Fed is expected to cut interest rates at its Sept. 17-18 meeting due to declining inflation and rising unemployment. Futures pricing suggests a quarter- or half-point reduction, but there is a strong possibility of a full percentage point reduction by the end of the year.

The rapid pace of cuts anticipated by traders at the start of the year has not been realized, with futures pricing being off the mark for most of the year.

"Porcelli stated that he is as curious about Wednesday's inflation report as anyone else, but he believes it would take a significant outlier to change the Fed's stance of focusing on labor and considering cutting in September. He suggested that the Fed should start off aggressively by cutting 50 basis points, but he believes they will start it off modestly."