Energy Prices Set to Lift Headline CPI; Core Reading in Focus

At 8:30 AM ET tomorrow, the September US CPI data is due. The report, together with Thursday's PPI, offers traders an important inflation data point as they gauge whether further Fed tightening is necessary. The readings will also allow analysts to estimate PCE and core PCE.

The expected numbers are as follows:

• Headline CPI month over month: forecast +0.6%, versus +0.4% last month.

• Headline CPI year over year: forecast +3.6%, versus +3.4% last month.

• Core CPI month over month: forecast +0.2%, versus +0.3% last month.

• Core CPI year over year: forecast +2.5%, versus +2.4% last month.

Attention will center on the core figures. A core MoM reading of 0.1% or lower, combined with a YoY rate of 2.4% or lower, would signal progress.

The central question is the extent to which energy costs are spreading.

The headline increase is likely to be powered by higher energy prices.

For the wider inflation picture, the crucial issue is whether these costs are seeping into other sectors. That brings the core reading, which omits food and energy, into sharp focus.

In August, gasoline climbed 3.9%, making up over a third of the month's headline gain. Core prices also increased 0.3%, with rises in airfares, accommodation, and used cars. Market participants will monitor if these underlying pressures abate in September.

A core MoM figure of 0.2% would mark a deceleration from August, even if the yearly rate ticks up. The two metrics can diverge since the annual comparison accounts for the year-ago figure.

What might these data imply for markets?

• Hotter core inflation (0.3% or higher): This could push Treasury yields higher and strengthen the dollar as traders reassess the risk of additional Fed tightening. I expect that an October hike, though possibly needed, is politically unlikely. The Fed would let the market tighten and stay out of the political crosshairs, especially under Trump.

• Core in line at 0.2%: This would give the Fed more leeway to hold off, especially if the headline rise is driven by energy.

• Softer core inflation (0.1% or lower): This could weigh on yields and the dollar while providing some stock market relief. Although a December hike remains possible (one more move), the probability of an October increase would fall to near 0% from the current 20%.

Currency traders will get a push from the data. Technical levels will indicate whether buyers or sellers maintain control after the initial reaction.

Monitor the price action relative to the pre-release range, key swing points, and the 100- and 200-hour moving averages. A sustained breakout is more significant. A breakout that promptly reverses suggests the market failed to follow through.