Understanding expected inflation estimates is crucial because any changes from these expectations can surprise the market. It’s also important to look at how forecasts are distributed, as many forecasts often cluster near specific values, like the upper limit, which can impact market reactions.

Consensus Figures

The year-on-year consensus for the Consumer Price Index (CPI) is 2.8% (59%), while other percentages include 2.9% (14%) and 2.6% (2%). For monthly CPI, there’s a strong agreement at 0.2% (65%), with small differences elsewhere. Core CPI year-on-year consensus is 3.0% (61%), and the monthly figure is centered at 0.3% (73%). If these consensus numbers deviate significantly, it could lead to major market movements. For example, a Core CPI year-on-year of 3.2% could cause the US dollar to rally, while a number of 2.9% might result in a weaker dollar. Recent dollar strength likely involved protection against possible CPI changes, and the Federal Reserve seems to be increasingly focused on labor market data. To lower the chances of a rate cut in September, a Core CPI of at least 3.2% might be needed, especially with the Federal Reserve discussions anticipated at the Jackson Hole Symposium. When considering the upcoming inflation report, it’s crucial to not only look at consensus figures but also how closely forecasts are grouped. There’s strong agreement for Core CPI at 0.3% month-over-month and 3.0% year-over-year. Significant deviations from these numbers could lead to the largest market shifts. This report is particularly important due to the recent change in Federal Reserve focus. The weak Non-Farm Payrolls report from July 2025, which added only 155,000 jobs, has made the Fed more attuned to the job market. Consequently, futures markets are currently pricing in a 70% chance of a rate cut in September.

Market Implications

Given yesterday’s unexplained dollar strength, possibly a hedge against high inflation, the simplest trades are evident. A Core Y/Y reading of 3.2% would challenge the rate cut narrative and likely cause the dollar to rally. This would be a notable surprise, as only 2% of analysts predict this outcome. A similar situation happened in late 2023 when markets expected early and significant rate cuts. A series of stubbornly high core inflation numbers in early 2024 quickly caused a hawkish shift. A strong report now could trigger a similar reversal of current dovish sentiments. On the flip side, a Core Y/Y figure of 2.9% or lower would strengthen the disinflation trend and likely weaken the dollar. This result would confirm expectations for a September rate cut and could even prompt the markets to consider a third possible rate cut by the end of the year. Regardless of what happens, the market’s attention will quickly shift. We will be listening for comments from Fed officials about any changes in perspective. The upcoming Jackson Hole Symposium at the end of the month will be a significant event for shaping expectations. Create your live VT Markets account and start trading now.

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