US CPI Report: A Critical Test for Fed’s Path Amid New Inflation Risks
As we approach Wednesday’s CPI release, the stakes are high for the Federal Reserve, with the data expected to provide key insights on the path back to the 2% inflation target. October’s CPI is anticipated to rise by +0.2% m/m, with core CPI at +0.3% m/m. Chair Powell has acknowledged recent progress but emphasized that core inflation remains “somewhat elevated.” This cautious tone reflects the balancing act facing the Fed, as any uptick in inflation could complicate its plan for gradual rate cuts.
The complexity of the situation is further intensified by the recent election of President-Elect Trump, whose proposed policies suggest potential inflationary pressures. His agenda of increased spending and fiscal stimulus could pose a challenge to the Fed’s inflation-fighting efforts, adding a layer of uncertainty to an already delicate balancing act. Powell has hinted at caution, noting that while recent data “wasn’t terrible,” any increase in inflation could indicate a prolonged struggle against inflation, especially if fiscal policies amplify price pressures.
With the December 18 FOMC meeting on the horizon, both STIR markets and recent Fed communication point toward a likely 25 bps rate cut. However, this CPI print will be pivotal; any unexpected increase could alter the outlook, with markets re-evaluating the Fed’s willingness to ease further.
What to Watch For: Upside Surprise or Relief on the Downside
An upside surprise in Wednesday’s CPI data could reinforce USD strength and signal continued caution from the Fed, potentially delaying the anticipated rate cut in December. Specifically, we’d look for:
- US Core CPI m/m (Oct 2024): 0.4% or higher
- US Core CPI y/y (Oct 2024): 3.5% or higher
- US CPI m/m (Oct 2024): 0.4% or higher
- US CPI y/y (Oct 2024): 2.7% or higher
If these conditions are met, with priors in line, expect immediate USD strength, leading to EUR/USD and Euro futures selling at market. This would suggest that inflation risks remain uncomfortably high, bolstering the Fed’s case for a “higher for longer” stance on rates.
On the other hand, a lower-than-expected CPI print would signal relief for the Fed, potentially allowing for a faster path to rate cuts. Such a print could trigger USD weakness, favoring EUR/USD buyers and USD/JPY sellers. Key levels to watch for a downside surprise include:
- US Core CPI m/m (Oct 2024): 0.1% or lower
- US Core CPI y/y (Oct 2024): 3.1% or lower
- US CPI m/m (Oct 2024): 0.0% or lower
- US CPI y/y (Oct 2024): 2.2% or lower
If these metrics come in below expectations, with priors in line, it would likely support USD/JPY selling as the market prices in a reduced need for restrictive policy.
Implications for Fed Policy and Market Positioning
For the Fed, Wednesday’s CPI data will be more than just another data point; it will be a critical signal on how aggressively they need to act in the face of potential inflationary headwinds. With Powell signaling caution, any substantial deviation from expectations could shift the Fed’s narrative, influencing both near-term policy and market sentiment. The Fed remains data-dependent, and this CPI print will be a defining moment for traders positioning around USD strength or weakness as we head into the end of the year.