Inflation sets the scene for the Fed: What to know this week

The week ahead will be all about inflation.

Tuesday morning will bring investors the closely-watched Consumer Price Index (CPI) for August, which will likely solidify in investors' minds whether the Federal Reserve raises interest rates by 0.50% or 0.75% at its policy meeting later this month.

Economists surveyed by Bloomberg expected headline CPI rose 8.1% over the prior year in August, a moderation from from 8.5% increase seen in July. On a month-over-month basis, CPI is expected to show prices fell 0.1% from July to August, primarily due to continued easing in energy prices. If realized, this would mark the first monthly decline since May 2020.

Core CPI, which strips out the volatile food and energy components of the report and is closely tracked by the Fed, is likely to have inched higher in August, rising 6.1% over the same month last year, more than the 5.9% year-on-year increase seen in July.

“In the run-up to the Fed’s next policy announcement on September 21, the release of August’s consumer price data could still be pivotal in determining whether the Fed will follow the European Central Bank and Bank of Canada with a 75 basis point hike or opt instead for a smaller 50 basis points,” Capital Economics Chief U.S. Economist Paul Ashworth wrote in a note.