All Eyes on Inflation This Week: What It Means for Fed’s Next Move

Two key inflation reports will be released this week, providing the Federal Reserve with sufficient data to inform its next policy decision.

It has been several months since President Donald Trump unveiled the contours of his sweeping global tariffs. While the administration’s sector-specific and reciprocal tariffs have not so far translated into soaring consumer prices, the data indicate that levies are gradually being reflected in the U.S. economy for both businesses and shoppers.

Economists suggest that it may take more time for tariff-driven inflation to accelerate as higher import duties are passed through supply chains, distribution networks, and other market channels.

“The thesis for the rising inflation is that tariffs are being passed on to consumers,” Mark Malek, CIO of Siebert Financial, said in a note emailed to The Epoch Times. “Though there is some evidence of that being the case, it is still unclear as to what the magnitude of it is or how long the effect will last.”

The likelihood, he says, is that higher import duties will produce one-time price adjustments.

At the same time, according to Fed Chair Jerome Powell, there is also a chance that levies will result in persistent inflationary challenges, a threat he says the central bank is prepared to address.

Producer Inflation

The first inflation report this week will be the Producer Price Index (PPI) for August, scheduled for release on Sept. 10.

The PPI is a monthly measurement of what businesses pay for goods and services, which is eventually passed on to consumers. Producer prices can serve as an indicator of pipeline inflation, as they represent an early point in the supply chain.

The consensus estimate suggests the Bureau of Labor Statistics will report a 0.3 percent rise in both the PPI and core PPI.

In July, wholesale inflation unexpectedly rose 0.9 percent and increased to 3.3 percent year-over-year. Core PPI, which strips out volatile energy and food prices, also surged at a higher-than-expected pace of 0.9 percent.

Final demand services were the main driver of the July PPI, rising 1.1 percent, primarily due to trade services. Final demand goods, meanwhile, jumped 0.7 percent.

Businesses have reported higher tariff-fueled input price pressures, according to the Fed’s latest Beige Book report.

The Beige Book—a periodic summary of economic conditions across the institution’s 12 districts—found that most districts described “price growth as moderate or modest.”

“Nearly all Districts noted tariff-related price increases, with contacts from many Districts reporting that tariffs were especially impactful on the prices of inputs,” the report stated.

Additionally, some firms noted that they were hesitant to pass higher costs on to customers, pointing to “customer price sensitivity, lack of pricing power, and fear of losing business.”

So far, aggregate consumer inflation has been tame. However, RBC economists say the latest PPI numbers suggest higher consumer prices could be ahead.

“The timing of tariffs passing through depends on factors such as inventory levels and the degree to which businesses absorb or pass on added costs,” they said in a Sept. 5 note. “As inventory buffers continue to erode, we see the effects of tariffs increasingly reflected in producer prices with the potential to spill over into broader inflation metrics in the months ahead.”

Consumer Prices

According to the Cleveland Fed’s Inflation Nowcasting Model, the headline annual inflation rate will tick up to 2.8 percent when the August Consumer Price Index is released on Sept. 11. Core inflation is also anticipated to rise to 3.1 percent.

On a monthly basis, CPI and core CPI are forecast to increase 0.3 percent.

By comparison, the 12-month inflation rate was unchanged at 2.7 percent in July. Core inflation, however, surged to 3 percent from 2.9 percent in the previous month.

“While the Fed’s stated goal is to see inflation trend to 2%, the reality is that they may be content keeping things at ~3% and lower as they focus on jobs,” Jay Woods, chief global strategist at Freedom Capital Markets, said in a note emailed to The Epoch Times.

The century-old institution maintains a congressionally authorized dual mandate of price stability and maximum employment. In recent years, monetary policymakers have concentrated on inflation, attempting to return it to the 2 percent target. However, recent remarks by Powell and some of his colleagues suggest that the Fed is focused on the other side of its twin mandate: the labor market.

Speaking in his final keynote address at the central bank’s annual Jackson Hole retreat, Powell noted that the labor market has transitioned into a “curious kind of balance” amid a slowdown in the supply of and demand for labor.

“This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment,” he said in an Aug. 22 speech.

Concerns about a deteriorating labor market were heightened by the Bureau of Labor Statistics’ latest preliminary annual benchmark revisions, which revealed 911,000 fewer jobs than initially reported during the 12 months prior to March.

However, Powell has warned for months that the Federal Reserve could face a situation where both mandates are under threat simultaneously, which could make policymaking more difficult.

In this economic climate, the United States would experience a stagflation-like scenario, characterized by higher inflation, rising unemployment, and anemic growth.

Some Fed officials have discussed the possibility of enduring such an environment.

“I think of tariffs as having a heavy stagflationary component,” Chicago Fed President Austan Goolsbee told CNBC’s “Squawk Box” last month.

Still, the United States might be able to avoid a 1970s-style economic event. The unemployment rate remains slightly above the historically low level of 4 percent. The U.S. economy rebounded 3.3 percent in the second quarter, and the Atlanta Fed GDPNow Model suggests third-quarter growth of 3 percent.

Looking ahead to the September CPI data, the annual rate is projected to edge up to 2.9 percent.

Rate Cuts in September—and Beyond

Ahead of the batch of inflation data, investors overwhelmingly anticipate the Federal Reserve will cut interest rates at the September 16-17 meeting.

But by how much?

According to the CME FedWatch Tool, the futures market is betting on a 92 percent chance of a quarter-point reduction to the benchmark federal funds rate. Eight percent of traders anticipate a half-point cut.

The federal funds rate is a crucial interest rate that influences borrowing costs for businesses, consumers, and governments. Since January, it has remained in a target range of 4.25 percent and 4.5 percent, down by 1 percent from a year ago.

Woods says if the annual inflation rate comes in cooler than expected this week, “then the chorus for a 50-basis point cut will grow louder.”

“The one fly in the ointment would be a hotter than expected number,” he added. “Many have debated that we don’t need a cut as it could lead to a spike in inflation and a hot number won’t help that discussion.”

But while Wall Street is penciling in a September rate cut, market watchers are also looking ahead to what the institution will do over the next several months.

Futures market data suggest most investors forecast two more quarter-point rate cuts by the year’s end. By December 2026, two-thirds of traders expect the policy rate will settle at around the 3 percent mark.