The worst inflation may finally be over

(CNN Business) – Is inflation really peaking? Are consumers becoming more confident? We’ll get those answers this week when the latest CPI and producer price indices are released, as well as the August retail sales numbers.

The numbers could change the calculation of the Federal Reserve, which is guaranteed to raise interest rates again at the next monetary policy meeting on September 21. The question is before how much?

Traders are still expecting another rise of three-quarters of a percentage point, or 75 basis points, the third consecutive move of this volume. “The Fed takes and accepts responsibility for price stability. We need to act now,” Federal Reserve Chairman Jerome Powell said last week.

Watch what consumers are doing in the face of inflation 1:04

But could the prospects for another interest rate hike diminish if inflation data suggest that “price stability” may finally be closer to reality? The CPI numbers will be released on Tuesday morning, while the Producer Price Index numbers will be released on Wednesday.

Note that at the end of July, the market was pricing with only a 28% chance of a 75 basis point hike in September. Investors now believe there is an 88% chance of another big rally, according to the Chicago Mercantile Exchange’s Fed Funds futures trading.

Economists are currently forecasting that consumer prices for August will be slightly lower than July and that prices are up 8.1% in the past 12 months. True, 8.1% is still incredibly high by historical standards, but it would be a marked slowdown from June’s 9.1% year-over-year price hike.

“We may have seen inflation peaking. Food and energy prices are coming down. There is more room for the downside,” said Joe Kalish, chief global macro strategist at Ned Davis Research.

Investors seem to be grudgingly accepting the possibility that the Fed will raise interest rates again by 75 basis points in a few weeks…regardless of what the August inflation data indicates.

But traders expect the September rate hike to be the last of this magnitude. Assuming the Fed raised rates by three-quarters of a point on September 21, that would raise rates to the target range of 3% to 3.25%.

Check out the November CME Fed Funds Futures Contract. As of Friday afternoon, investors were seeking a 70% chance of raising half a point at the Federal Reserve’s November 2 meeting… to a range of 3.5% to 3.75%.

However, there was only a 10% chance of a fourth straight increase of 75 basis points, which may be one reason stocks have risen so far in September after falling in August.

Price increases are slow and consumers keep spending

It is clear that Wall Street is betting that inflation trends will continue in the right direction. Economists also expect producer prices and the cost of goods at the wholesale level to fall slightly in August. Expectations are for a 0.1% decline from July to August, after a 0.5% decline from June to July.

Producer prices rose 9.8% year-over-year in July, but that’s lower than June’s peak of 11.3%. Any further slowdown is likely to be welcomed by the market, the Federal Reserve and consumers.

This brings us to retail sales. Consumer spending figures for August will be released Thursday morning. The government reported last month that retail sales rose 10.3% year-on-year in July. It will be interesting to see if that sales rate increased in August or slowed.

The Federal Reserve is in a difficult situation. He wants to put an end to inflationary pressures and the way to do that is by big increases in interest rates. But the Fed would also like to avoid a recession if it can, which is why some still expect a “soft” landing for the economy, Powell said in May.

Powell also talked about rising interest rates and inflation causing “some pain” for the economy in his speech at Jackson Hole last month. This could be an argument for the Fed to raise interest rates…as long as inflation continues to subside.

This is the main point. Investors need to pay more attention to inflation data than Powell or other Fed members are saying, and the Fed remains dependent on data, which is why the prospects for rate hikes are constantly changing.

“There must be a convincing downward trend in inflation. We are not there yet,” David Donabedian, chief investment officer at CIBC Private Wealth US, said in a report on Friday.

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