Inflation in the US is expected to have eased off in August as gasoline
prices dropped, supply chains improved and traveling costs fell. Data for
consumer price index (CPI) inflation will be released Tuesday at 8.30am Eastern
time and the headline inflation is expected to fall while core inflation, excluding
energy and food prices, should rise. The report is also crucial because it is
expected to influence the Federal Reserve’s decision on how much to hike
interest rates next week and in the long term.

CPI for all items is estimated to have declined by 0.1% month over month
in August, after a flat figure in July, according to Dow Jones. On an annual
basis, headline inflation would be increasing at a rate of 8%, down from 8.5%
in July.

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Core CPI, excluding gasoline, is expected to increase by 0.3%, the same
as in July. On an annual basis, that would be a 6% rise, even higher than the
5.9% gain in that month.

For the Fed, the report is widely expected to confirm that it needs to
raise the interest rate by 0.75 percentage points at its policy meeting next
week, the third of that size in a row. If the inflation data is lower than
expected there’s an outside chance the Fed could raise it by just a half
percent, according to some economists.

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“If anything, the risk is it could come in a little bit weaker,” said
Aneta Markowska, chief economist at Jefferies. “I have energy goods down 10.2%.
That should knock off a half percent. I think the core is going to be more
important,” she said.

Markowska expects headline inflation to decline by 0.2% in August, but
sees an increase in the core of 0.3%. Shelter is one segment anticipated to
rise, while used car prices are expected to fall.

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“I think we’re going to see a repeat in terms of airfares and hotel
prices. They dragged down the core CPI last month. It looks like airfares will
be down 8%. They were up 40% from March to May. We’re just unwinding a portion
of that,” said Markowska.

According to economists, the base effects of comparing the number to
last year are behind the rise in August core inflation.

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“Because of base effects annual core inflation will likely accelerate in
the next two reports, which would make uncomfortable headlines for the Fed,”
wrote Blerina Uruci, chief US economist at T Rowe Price.

It should not matter to Fed officials because they will be more focused
on momentum, and will be watching the three-month and six-month annualized
pace. ″But they are also sensitive to how it will look to the public and
Congress. Even more, reason to maintain a hawkish focus,” she added.

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The central bank’s September 21 rate decision may be affected by the
August CPI report, but the details inside the report may be more important in
terms of what they say about the long-term outlook. That could help form the
expectations for the Fed’s end, or terminal, rate when it stops rising.