Incoming Inflation Reports will Bring Missing Pieces to the Hike/No Hike Puzzle

• The solid August jobs report from last Friday allows the Fed to focus on its price stability mandate when it meets next week amidst a seemingly stable labor market.  The final pieces of the hike/no hike puzzle should come together this week with PPI Thursday and CPI on Friday. We talk about both reports and the expectations below but suffice it to say we think it will buttress a move to hike unless the reports surprise to the downside. Meanwhile, oil prices continue higher, (WTI 27% higher since July) as Iranian-backed Houthi rebels attacked several Saudi Arabian energy facilities in the southern part of the country, near the Houthi stronghold of Yemen. The US also destroyed and/or disabled 5 Iranian-linked oil tankers and the escalation adds to the belief that a resolution to the Iran war will continue to remain elusive. New Treasury supply this week should also keep the long end trading heavy with $39 billion in 10yr notes selling today at the highest yield in nearly 20 years. Currently, the 10yr is yielding 4.82%, up 1bp on the day, while the 2yr is yielding 4.42% up 2bp on the day.

• This morning, the weekly ADP Pulse Report saw private employers add an average of 12,000 jobs for the week ending August 22 vs. 10,000 the prior week. This is only the third week-over-week gain in the series since May and illustrates the ongoing low-hire, low-fire environment we’ve been in for most of the last year. The weekly total is a four-week average which provides some smoothing to week-to-week volatility. The latest figure rounds to a monthly figure near 50,000 which has been close to the recent run rate for monthly ADP job growth estimates.

• Tomorrow brings us August PPI and combined with CPI will allow analysts to better estimate the PCE inflation numbers due at the end of the month. That’s especially important this month as the BEA is incorporating adjustments to several line items in its PCE inflation calculation, and some of those derive from the PPI report. Those changes are expected to reduce the annual rate of core PCE by 0.2% which is good but still a long way from 2.0%. Headline Final Demand is expected up 0.4% vs. 0.0% in July with the YoY rate expected to increase from 4.7% to 5.3%.  Ex-food, energy, and trade the index is expected to increase 0.3% vs. 0.4% in July with the YoY rate expected to be unchanged at 4.7%. Despite this expected improvement the YoY rate will remain the highest since Dec. 2023 when rates were retreating after peaking in late 2021/early 2022 at 7.0%.

• Expectations for Friday’s August CPI see headline inflation increasing 0.4% MoM vs. 0.1% in July with YoY unchanged at 3.4%. Core CPI (ex-food and energy) is expected to increase 0.2% MoM, same as July, with core YoY down a tenth to 2.4%. The YoY expectation for core CPI is helped by a 0.3% print from August 2025 rolling off. The problem is that through the end of 2025 0.2% prints (September and December) roll off, (October and November were skipped to the government shutdown). Thus, it will be difficult to see any improvement by year-end if we’re stuck adding fresh 0.2% MoM increases and cooler prints look increasingly unlikely with tariffs, energy, and AI buildout providing headwinds to lower prices. If the Fed does hold rates steady next week the hawks will be calling for a rate hike in October (unlikely perhaps with the midterm elections looming), and no doubt in December.

• With the two inflation reports in hand, the FOMC will have all the information for the rate decision next Wednesday. We think unless the reports, particularly CPI, come in cooler than expected they will hike 25bp. There may well be some rate doves dissenting but with tariffs moving back front and center (see Canada), the Iran war and its shipping bottleneck showing no signs of abating, and the AI buildout with its increased demand for chips and other networking equipment continuing into 2027, the luxury of “looking through” those items as one-offs is increasingly strained logic. This is especially so after Warsh’s Jackson Hole speech where he reiterated the focus on inflation and five years and counting of being well above the 2% target. It’s easy to say a hike won’t be a popular move with Trump, but not hiking will create more market blowback regarding the inflation fighting credibility of the Fed.

• Yesterday, the NY Fed yesterday released the August Survey of Consumer Expectations. Generally, consumers see inflation changing little over the near and three-year horizon, while a larger percentage see higher unemployment with no change in increased income prospects, but as we’ve come to expect, the consumer still sees increased spending expectations even with expectations of decreasing household financial situations. The following are some of the key results of the survey.

1. Median inflation expectations at the one-year and five-year-ahead horizons were unchanged at 3.6% and 3.0%, while they decreased at the three-year-ahead horizon by 0.1 percentage point to 3.2%. Gas price growth expectations increased again in August.
2. Labor market expectations were mixed. Average unemployment expectations—or the average probability that the U.S. unemployment rate will be higher one year from now—increased by 1.6 percentage points to 44.4%, its highest reading since April 2020. The increase was broad-based across age, education, and income groups.
3. The median expected growth in household income remained unchanged at 3.0% in August. The series has been moving in a narrow range between 2.8% and 3.0% since June 2025.
4. Median one-year-ahead household spending growth expectations increased by 0.3 percentage point to 5.2%, above its 12-month trailing average of 5.0%.
5. Perceptions and expectations about households’ financial situations both deteriorated with larger shares of households reporting a worse financial situation compared to a year ago and expecting a worse financial situation a year from now, and smaller shares of households reporting or expecting a better financial situation.

Gas and Diesel Prices Continue HigherSource: Bloomberg

Demand From the AI Buildout is Spreading into other Computer-Related AreasSource: Claudia Sahm, BEA

Monthly Core PCE – Hard to Argue it’s Heading in the Right DirectionSource: Claudia Sahm, BEA