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  • Writer's pictureSieracki Milosz

US Consumer Price Index (CPI) Forecast for August 2023 | Impact on USD and Fed Policy

The Consumer Price Index in the US: What to Expect in August


US Consumer Price Index CPI Impact on USD and Fed Policy

The Consumer Price Index (CPI) in the United States is a critical economic indicator that measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. In this article, we will delve into the upcoming release of the CPI data for August, exploring its potential impact on the US Dollar's valuation and its significance for the Federal Reserve's policy decisions.


Understanding the Consumer Price Index (CPI)

Before we dive into the details, let's clarify what the Consumer Price Index entails. The CPI is divided into two main components: the headline CPI and the Core CPI. The headline CPI includes all items in the market basket, making it a comprehensive measure of inflation. On the other hand, the Core CPI excludes volatile food and energy prices, offering a more stable indicator of price changes.


The Upcoming CPI Release


The highly-anticipated US CPI data for August is set to be released by the Bureau of Labor Statistics (BLS) on Wednesday at 12:30 GMT. This release holds significant importance as it could impact the US Dollar's value, which has been performing well in recent months.


Recent Economic Performance

The US Dollar has been gaining strength since mid-July, primarily due to positive macroeconomic data releases. These releases have highlighted the relatively upbeat performance of the US economy, including tight labor market conditions. Federal Reserve (Fed) Chairman Jerome Powell, in his recent appearance at the Jackson Hole Symposium, reiterated the Fed's readiness to raise the policy rate further if necessary.


Potential Impact on the US Dollar

The upcoming CPI data release has the potential to influence the US Dollar's valuation significantly. It could lead to shifts in how markets price the Fed's rate outlook. Investors will closely scrutinize the report's details to gauge progress in addressing persistent inflationary pressures.


Heading into the release, the CME Group FedWatch Tool indicates that markets are pricing in a 40% probability of the Fed raising the policy rate by 25 basis points (bps) before the end of the year. This reflects the uncertainty surrounding inflation and its implications for Fed policy.


What to Expect in the CPI Data


Headline CPI

The US Consumer Price Index, on a yearly basis, is expected to rise by 3.6% in August. This is a notable increase from the 3.2% recorded in July. The surge can be attributed to various factors, including rising energy prices, which spiked by nearly 20% in July and August. This energy price increase is likely to have a significant impact on the August CPI.


Core CPI

The Core CPI, which excludes the influence of volatile food and energy prices, is forecasted to rise by 4.3% in August. This is a slight decrease from the 4.7% growth seen in July. Core inflation figures are closely monitored by policymakers as they provide insights into the underlying inflationary pressures in the economy.


Inflationary Pressures

Despite the moderation in Core CPI, the Fed is unlikely to overlook the substantial increase in energy costs when determining its policy stance. A stronger-than-expected rise in the overall CPI could still lead to hawkish Fed bets, even if Core CPI eases slightly.

In August, the Prices Paid Index of the ISM Manufacturing PMI indicated a slowdown in input deflation, rising from 42.6 in July to 48.4. Furthermore, the Prices Paid Index of the ISM Services PMI surged to its highest level since April at 58.9. This suggests an acceleration in the service sector's input inflation, adding to the complexity of the inflationary picture.


Analysts' Insights


Analysts at Danske Bank offer their perspective on the upcoming CPI data:

"The August CPI marks the final key data release ahead of the September FOMC meeting. We expect easing wage pressures to translate into further cooling in core services prices and forecast another core CPI print at +0.2% month-on-month. While an unchanged rate decision is the clear base case for both us and the markets, the focus will be on the updated 'dots,' where a low inflation reading could push some participants to revert their June call for one more hike later in the year."


Endnote

In conclusion, the release of the US Consumer Price Index (CPI) data for August is poised to have a significant impact on financial markets and the US Dollar's valuation. Investors and policymakers will closely watch the numbers to gauge the trajectory of inflation and its implications for future Federal Reserve policy decisions


FAQs


1. What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) is a measure of the average change in prices paid by urban consumers for a basket of goods and services over time. It helps assess inflationary trends in the economy.


2. Why is the Core CPI important?

The Core CPI excludes volatile food and energy prices, providing a more stable indicator of inflation. It helps policymakers understand underlying inflationary pressures.


3.What could a strong CPI reading mean for the US Dollar?

A strong CPI reading could lead to a stronger US Dollar as it may influence the Federal Reserve to consider more hawkish monetary policy actions.


4.How do rising energy prices impact inflation?

Rising energy prices can contribute to inflation as they increase the cost of production and transportation, leading to higher prices for goods and services.


5.What are the implications of the CPI data for the Federal Reserve's policy decisions?

The CPI data can influence the Federal Reserve's policy decisions, especially regarding interest rates. A high CPI reading may lead to tighter monetary policy to combat inflation.



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