How many millions of jobs can be lost to inflation in the US?
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(CNN Business) --
Is inflation really peaking?
Are consumers becoming more confident?
We'll get those answers this week when the latest consumer and producer price indices are released, as well as retail sales figures for August.
The numbers could change the calculation of the Federal Reserve, which is guaranteed to raise interest rates again at its next monetary policy meeting on September 21.
The question is, by how much?
Traders are still predicting another rise of three-quarters of a percentage point, or 75 basis points, the third consecutive move of that size.
And Fed Chairman Jerome Powell said last week that "the Fed has and accepts responsibility for price stability. We need to act now."
See what consumers are doing in the face of inflation 1:04
But might the odds of another big rate hike diminish if inflation data suggests "price stability" may finally be closer to reality?
Consumer Price Index (CPI) figures will be released this Tuesday morning, while Producer Price Index (PPI) figures will be released this Wednesday.
Note that at the end of July, the market was pricing in only a 28% chance of a 75 basis point hike in September.
Investors now believe there is an 88% chance of another big rally, according to fed funds futures trading on the CME.
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Economists currently forecast that consumer prices for August will fall slightly from July and that prices are up 8.1% in the last 12 months.
Granted, 8.1% is still incredibly high by historical standards, but it would be a notable slowdown from June's 9.1% year-over-year rise in prices.
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"We've probably seen the top of inflation. Food and energy prices are coming down. There's more room to the downside," said Joe Kalish, chief global macro strategist at Ned Davis Research.
Investors seem grudgingly accepting the likelihood that the Fed will raise rates again by 75 basis points in a few weeks…regardless of what the August inflation data indicates.
But traders expect September's rate hike to be the last of such magnitude.
Assuming the Federal Reserve raises rates by three-quarters of a point on September 21, that would bring interest rates to a target range of 3% to 3.25%.
Check out CME fed funds futures for November.
As of noon Friday, investors were pricing in a 70% chance of a half-point hike at the Nov. 2 Fed meeting... to a range of 3.5% to 3.75%.
However, there was only a 10% chance of a fourth consecutive 75 basis point increase, which could be one of the reasons stocks have rallied so far in September after their August drop.
Price increases slow and consumers continue to spend
Wall Street is clearly betting that inflation trends will continue to go in the right direction.
Economists also expect producer prices, the cost of goods at the wholesale level, to fall slightly in August.
The forecasts are for a drop of 0.1% from July to August, after a decrease of 0.5% from June to July.
Producer prices increased 9.8% yoy in July, but that is below June's peak of 11.3%.
Any further slowdown would likely be welcomed by the market, the Fed and consumers.
That brings us to retail sales.
Consumer spending figures for August will be released this Thursday morning.
The government reported last month that retail sales rose 10.3% year over year in July.
It will be interesting to see if that sales rate picked up in August or slowed down.
The Fed is in a difficult situation.
He wants to put an end to inflationary pressures and the way to do it is with big increases in interest rates.
But the Fed would also like to avoid a recession if it can, which is why some still expect a "soft" landing for the economy, as Powell said in May.
The Federal Reserve passes the buck on inflation
Powell also spoke about rate hikes and inflation causing "some pain" to the economy in his Jackson Hole speech last month.
That could be an argument for the Fed to make smaller rate hikes… as long as inflation continues to cool.
And that is the key point.
Investors need to pay more attention to inflation data than to what Powell or other Fed members say. The Fed remains data dependent, which is why rate hike probabilities are ever changing.
"There should be a compelling downward trend in inflation. We're not there yet," David Donabedian, chief investment officer at CIBC Private Wealth US, said in a report on Friday.
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