US CPI inflation is critical to the Fed’s decision to shake up gold, stocks and the US dollar

The Fed will cut rates, but by how much? The all-important CPI report for August comes a week before the announcement and is instrumental in shaping it. Gold, stocks and the US dollar are all set to explode. Live coverage.

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CPI inflation comes as investors fear a slowdown

Headline inflation is likely to fall to its lowest level since 2021 – energy and food price increases have eased. What matters to markets is the core consumer price index (core CPI), which excludes these volatile elements. Given the softer labor market, wage growth is also slowing, putting a lid on service prices.

At current inflation levels above the Federal Reserve’s 2 percent target, a drop is a blessing. However, lower price increases may reflect a weak economy – as seen in China, which is experiencing output price deflation.

The Federal Reserve is set to cut interest rates on September 18 – Fed Chairman Jerome Powell has made that clear. However, the uncertainty comes from the size of the cut – a standard move of 25 bps or a double dose of 50 bps, which markets want.

Lower inflation means a greater chance of a 50 basis point cut, and that would boost gold and stocks while weighing on the US dollar. Higher inflation would support the greenback while weighing on gold and stocks.

Core CPI MoM is the key figure to watch and the economic calendar points to a 0.2% increase in August, a repeat of July’s figure.

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