The “final puzzle” of the Federal Reserve's decision is revealed tonight! The probability that the CPI may reach 3.4% in August and interest rate hikes has now surged above 73% 

The Zhitong Finance App learned that the US Bureau of Labor Statistics will release the August Consumer Price Index (CPI) report at 8:30 a.m. EST (20:30 Beijing time tonight). This report will be the last piece of the inflation puzzle obtained by the Federal Reserve before next week's interest rate decision. If the Dow Jones consensus is correct, the report will show that prices of all goods and services rose 0.4% month-on-month last month, with an annual inflation rate of 3.4%. Excluding food and energy prices, core inflation is expected to be 0.2% month-on-month and 2.4%, respectively.

Combined with the producer price index (PPI, an index that measures wholesale inflation) released on Thursday, CPI will help Federal Reserve officials predict the performance of its preferred inflation indicator, the personal consumption expenditure (PCE) price index, when announced at the end of September.

The data is also expected to play an important role in the Federal Open Market Committee (FOMC) interest rate decision next Wednesday. Any change in percentage points could mean keeping interest rates unchanged or raising interest rates.

“The September FOMC decision ultimately depends on CPI data... because most of the PCE sub-items are derived from the CPI,” Nomura economist said in the report. “Currently, we maintain the forecast that the Federal Reserve will not raise interest rates at the September FOMC meeting. However, if the August CPI data, especially the PCE related segments, unexpectedly rise, it will significantly increase the possibility of policy tightening next week.”

Following the release of PPI data on Thursday, traders raised the probability of a 25 basis point rate hike to over 73%, according to CME's FedWatch measurement of futures prices.

However, expectations have been fluctuating and are highly dependent on data and energy price trends, which makes the stakes for Friday's data even more significant. Federal Reserve Chairman Kevin Walsh has stated that the direction of monetary policy depends on market indicators.

“At the beginning of the month, the Federal Reserve's decisions in September seemed to be evenly matched. The sharp rise in energy prices in September may tilt the balance in favor of interest rate hikes at the Federal Reserve meeting next week,” said Bill Adams, chief US economist at May 3 Bank. “A major accident in tomorrow's August CPI report, or a last-minute agreement with Iran, may still affect the decision.”