Make-or-Break CPI Report Could Shock Markets and Derail Fed Rate Cut Plans

WATCH: Uranium, and Real Assets Could Be the Only Safe Havens as Easy Money Ends

The most closely watched economic release next week will be the July Consumer Price Index, due from the Bureau of Labor Statistics at 8:30 a.m. ET on Tuesday, August 12. Markets view it as the single most important data point before the Federal Reserve’s September 16–17 policy meeting, with consensus calling for core CPI to rise 0.3% month-on-month, up from 0.2% in June. That pace would push annual core inflation to 3.0% from 2.9%, the first move above 3% since February. Headline CPI is expected to gain 0.2% MoM, slower than June’s 0.3%, but still lift the YoY rate to 2.8% from 2.7%.

These readings would reinforce the recent trend of inflation drifting higher after bottoming earlier this year. Core CPI hit a low of 2.8% YoY in March before turning up in June, suggesting underlying price pressures are reasserting themselves. If consensus proves correct, the data would place core inflation firmly above the Fed’s 2% target, a psychologically important threshold for markets and policymakers alike.

Traders will be focused on several key components for clues about the drivers of inflation and whether tariff-related costs are starting to filter through. Shelter remains the largest CPI category and has been moderating toward pre-pandemic norms, offering some offset to broader price pressures. But goods prices—especially in categories such as appliances, apparel, and new vehicles—are expected to show fresh upward momentum as retailers work through inventory and face higher import costs. June’s CPI already hinted at a rebound in goods inflation, and July could see that trend accelerate.

Tariffs are the primary new inflationary catalyst. Reciprocal tariffs averaging roughly 20% went into effect on August 7, but July’s data will reflect earlier rounds that generated nearly $30 billion in collections last month. The key question is whether importers absorbed those costs or began passing them on to consumers. The Fed’s baseline view is that tariff effects will be transitory, allowing policymakers to “look through” temporary price bumps while focusing on the labor market. However, if CPI shows broad-based, persistent increases in goods categories, the hawkish camp—arguing tariffs create lasting inflation—will gain traction.

Services inflation is another focal point. This segment was stubbornly high after the pandemic but has begun to cool in recent months. A further slowdown in services prices could cushion the impact of rising goods inflation, but if both accelerate simultaneously, it would raise the odds that July marks the start of a more persistent inflationary upturn. Policymakers will also be watching medical services, transportation services, and recreation prices for signs of continued stickiness.

The policy backdrop makes this report especially critical. Tariffs and restrictive immigration policies—another potential inflationary force via labor supply shocks—are expected to slow growth while keeping prices elevated, a combination economists label stagflationary. The Fed is widely expected to begin easing rates later this year in response to labor market weakness, but an upside CPI surprise could delay or even derail those plans. If markets start to believe the Fed’s “transitory” view on tariffs is wrong, short- and long-term yields could rise sharply, and equity valuations could face pressure.

Beyond CPI, next week’s U.S. data will include other inflation measures that will help confirm—or challenge—the CPI signal. Thursday brings the Producer Price Index, which tracks wholesale inflation and often provides an early read on trends in goods prices. The Cleveland Fed’s inflation expectations series will also be released, offering insight into whether consumers and businesses are beginning to anticipate higher prices ahead. Friday’s calendar features the Import and Export Price Indexes, which are especially relevant in the current trade environment, and preliminary University of Michigan consumer sentiment, which includes closely watched inflation expectations. Retail sales for July, also due Friday, will be parsed for signs that inflation is affecting consumer spending patterns.

Still, CPI will dominate the week’s macro narrative. Base effects from last year’s low July reading will mechanically push the annual rate higher this month, even if monthly gains are modest. But if the MoM print matches or exceeds the expected 0.3% for core, it would underscore the risk that inflation is not merely a statistical quirk but an actual reacceleration. Analysts note that keeping monthly core CPI at 0.3% through November would hold the annual rate at 3%, but sustained 0.4% prints could push it toward 3.7% by year-end—a scenario consistent with a persistent inflation shock.

The market impact could be substantial. A softer-than-expected CPI, particularly if paired with tame PPI and import price data, would reinforce the Fed’s transitory inflation narrative and keep September rate cuts on the table. A hotter report—especially one showing broad-based goods and services price increases—could force markets to reprice for a longer hold or even renewed rate hike discussions. In that case, Treasury yields could surge, the dollar might strengthen, and equities could face headwinds, especially in high-valuation growth sectors.

With the economy at a delicate inflection point, Tuesday’s CPI will be less about a single number and more about the story it tells—whether the U.S. is still in a fading inflation cycle or entering a new phase of stubborn price pressures. Given the stakes, investors across asset classes are likely to treat this release as a make-or-break moment for the near-term market narrative.