How to interpret CPI later?

1. During the last FOMC, Hammack/Kashkari/Logan were already three hawkish votes. This time around, Chairman Warsh made it clear at Jackson Hole that he’s leaning hawkish and wants to curb inflation. Meanwhile, Waller, the key indicator, softened his stance a bit last week, saying the decision hinges on today’s CPI. So whether today’s CPI comes in hot or cool will directly determine the Fed’s reaction next week. 2. Focus on the two monthly rates in Chart 1. The top one is headline CPI, and the bottom one is core CPI. Core CPI is more important than headline CPI. Waller already mentioned at Jackson Hole that the energy/tariff transmission effects have passed, so the 0.4-0.5% bump in headline CPI driven by oil prices shouldn’t directly influence rate hike decisions. 3. The real focus should be on the core monthly rate below. The current forecast for core CPI is 0.2%, which is a rounded number. What really matters is the decimal point before rounding. For example, 0.15% rounds to 0.2%, and 0.24% also rounds to 0.2%. Currently, the prediction for 0.2% on Poly is at 69%, so the probability of it staying at 0.2% after rounding is the highest. But the market trend will ultimately depend on the decimal point behind the scenes. 3. The key threshold for core CPI predictions across the board is around 0.19%-0.20%. Scenario estimates for core CPI monthly rate (before rounding): <= 0.14% (rounded to 0.1%) Inflation is cool, no rate hike, bullish. 0.15%-0.20% (rounded to 0.2%) Inflation is slightly cool, rate hike probability decreases slightly, bullish. 0.20%-0.24% (rounded to 0.2%) Inflation is slightly hot, already priced in, rate hike probability around 60%. Might see a spike but not necessarily break the range. >= 0.25% (rounded to 0.3%) Inflation is hot, rate hike probability increases significantly, bearish. ------------ As usual, before the release, we’ll keep running scripts to grab the raw data from BLS to calculate the unrounded numbers... After the release, we’ll update further. #CPI #FOMC #Inflation #RateHike #MacroAnalysis