Two key inflation reports this week will help determine how much the Fed will cut interest rates

The Fed will take a final look at inflation data this week before confirming soon the size of its widely expected rate cuts.

On Wednesday, the U.S. Department of Labor’s Bureau of Labor Statistics will release its August consumer price index report. A day later, the Bureau of Labor Statistics released its report on the Producer Price Index, also for August, which is used as a proxy for wholesale-level costs.

With the question of whether the Fed will cut interest rates at the end of its next policy meeting on September 18 largely settled, the only question is how much. Friday’s jobs report didn’t provide much clarity on the issue, so it will be left to CPI and PPI readings to clarify.

“Inflation data has taken a back seat to labor market data in terms of impact on Fed policy,” Citigroup economist Veronica Clark said in a note. Council officials themselves are divided over the appropriate size of a first rate cut on September 18, with August consumer price index (CPI) data likely to remain an important factor in the upcoming decision.”

Dow Jones’ consensus forecast is for CPI to rise 0.2%, both for all items and for core CPI, which excludes volatile food and energy items. On an annual basis, inflation rates are expected to be 2.6% and 3.2% respectively. Both the overall producer price index (PPI) and the core producer price index (PPI) are expected to rise 0.2%. Fed officials generally place more emphasis on core indicators as better indicators of long-term trends.

At least for CPI, the reading is not particularly close to the Fed’s long-term target of 2%. But there are some important considerations to remember.

First, although the Fed focuses on CPI, it is not the primary measure of inflation. That will be the Commerce Department’s Personal Consumption Expenditures Price Index, which recently put headline inflation at 2.5% in July.

Second, policymakers are paying almost as much attention to the direction of the move as to the absolute value, with the trend over the past few months toward a marked slowdown in inflation. Especially in terms of overall prices, the 12-month CPI in August is forecast to fall by 0.3 percentage points from July.

Finally, Fed officials’ focus has shifted from curbing inflation to growing concerns about labor market conditions. Since April, hiring activity has slowed significantly, with the average monthly increase in non-agricultural employment falling to 135,000 from 255,000 in the previous five months, and job openings also declining.

As concerns about labor intensify, so do expectations that the Federal Reserve will begin cutting interest rates. The current benchmark federal funds rate is 5.25% to 5.50%.

Dean Baker, co-founder of the Center for Economic and Policy Research, wrote: “August’s CPI report should show more progress in bringing inflation back to the Fed’s 2.0% target. Progress. “Barring some extraordinary surprises, there should be nothing in this report that would prevent the Fed from cutting interest rates, probably significantly.”

However, the market seems to have accepted the news that the Fed will start slowly.

Futures markets on Tuesday were pricing in a 71% chance of the Federal Open Market Committee easing policy with a 25-percentage point rate cut, while only a chance of a larger half-percentage point cut was seen, according to CME. 29% of the group’s Fed observed.

However, some economists think this may be a mistake.

Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, cited a general pullback in hiring and sharp declines in employment in previous months, arguing that “the summer slowdown is likely to be more severe in a few months.” Severe”, and the downward trend in employment rates may become even more severe. Recruitment is “still a long way off.”

“We are therefore disappointed, but not surprised, that FOMC members who spoke after the jobs report but before the pre-meeting blackout still favored 25 [basis point] “Easy policy this month,” Tomes said in a note on Monday. “But with two jobs reports on hand by the November meeting, the case for a quick rate cut will be overwhelming.”

In fact, although market pricing indicates a tepid start to September’s interest rate cut, it is expected to be half a percentage point in November and possibly another half percentage point in December.