The US economy is riding rough waters with inflation still problematic across the board, including in the service sector. After all, just last week came reports that the labor market is starting to crack. Job losses have been updated up by 911,000 jobs in the last year. With the unemployment rate increasing to 4.3%, its highest level since 2021, fears regarding a slowing economy grow. Analysts are closely watching the upcoming Consumer Price Index (CPI) report, set to be released on Thursday at 12:30 GMT, as it may significantly influence the Federal Reserve’s monetary policy decisions scheduled for mid-September.
Inflation remains stubbornly above the Federal Reserve’s target of 2%, deepening skepticism about runaway inflation among economists and those in charge of monetary policy. The Producer Price Index (PPI) recently reported a monthly decline of 0.1%, yet this has not bolstered confidence in the Greenback, which lost 0.1% during the session. This downward trend in the US Dollar, which has lasted since mid-August, casts doubt on whether this trend will continue in the coming weeks.
Stubborn Inflation in Services
US inflationary pressures have turned out to be quite persistent, especially in the services industry. Goldman Sachs economists just came out with a note reiterating that tariffs are pushing up inflation. That’s particularly notable in areas such as communications, furniture and recreation. This points to more external factors outside of our control, such as tariffs, causing continued inflationary pressure.
Fifth, inflation remains well over the Federal Reserve’s 2% target. Surging construction costs current projections have annual inflation at 2.9%, up from 2.7% in July. Core CPI is expected to remain stable at 3.1%, suggesting that while overall inflation might be inching upwards, core components are showing signs of steadiness.
These persistent inflationary trends foster an environment of unpredictability for consumers and businesses to operate in. Frank Lee, an economist at Morningstar, commented on the broader implications of rising costs: “This is not a one-off shock, but a gradual rise in costs and supply disruptions that are increasingly affecting households.” This point of view sheds light on the sticky nature of inflation and its impact on consumers’ long-term buying decisions.
Labor Market Weakness
The working class is under unprecedented pressure. In fact, all job creation over the last year have been revised down by a whopping 911,000 jobs. The economic downturn has pushed the unemployment rate up to 4.3%. That’s the highest level we’ve observed since 2021.
Our businesses are struggling with skyrocketing increased input and inflationary costs. This new caution on hiring risks introducing further friction into an already tight labor market. James Knightley, chief international economist at ING, gave a blunt but effective picture of what’s going on. He said, “The triple whammy of price, income and wealth is a toxic mix for growth.” This sentiment underscores the larger, interrelated problems that are choking our economy. Their efforts are starting to lose steam, weighed down by skyrocketing inflation and a weakening job market.
Market Reactions and Federal Reserve Outlook
The US Dollar Index has given back some ground, now testing a dynamic support level at 97.60. A breakout from the current bearish channel has analysts convinced is key. This channel, marked by limits on either side between 97.25 and 98.55, such a move would create powerful bullish market momentum.
In essence, traders are looking ahead to the next CPI report with great anticipation. Moreover, they are pricing in a 90% chance of at least a 25 basis point interest rate cut by the Federal Reserve, with just 10% expecting a more aggressive 50 basis point cut. That upcoming data may be extremely important to the Federal Reserve’s decision on whether to alter monetary policy on September 16-17.
The outcome of this upcoming CPI report will likely set the tone for market sentiment in the days to come after its release. Investors already hang on inflation data as a trigger for heart-stopping policy pivots. These changes, of course, affect the strength (or lack thereof) of the Greenback.