CPI’s Final Boss: Can One Print Stop Powell’s Cut?

After an across-the-board downside surprise in PPI, tomorrow’s CPI (Thu, 8:30 a.m. ET) is the Fed’s last major input before next week’s meeting—and the hurdle for a “too hot” print big enough to derail a 25 bp cut is high. The macro backdrop has swung dovish: payrolls were revised down by 911K for Apr ’24–Mar ’25, suggesting a softer labor market, while wholesale prices just cooled notably. Futures still place only ~10% odds on a 50 bp move; base case remains 25 bp, with the real swing factor now being Powell’s tone and the path he sketches for 2025.

Consensus expects +0.3% m/m for both headline and core CPI, putting headline y/y at 2.9% and core y/y at 3.1%. That’s essentially a replay of July’s +0.3%/+0.3%, but with annual rates nudging up from 2.7% (headline) and flat at 3.1% (core). Some forecasters lean a hair hotter (GS ~0.37% headline, 0.36% core) on food/energy and selective tariff pass-through; others flag a cooler print if autos and travel soften. Practically, it would likely take core below 0.1% m/m with broad-based services strength to resurrect serious 50 bp chatter for next week.

The PPI miss matters because it reduces pipeline pressure into CPI. Services margins, which spiked in July PPI, reversed in August; goods were tame overall despite a modest firming ex-food/energy. That mix argues for a more benign CPI unless we get category-specific surprises. The Fed will parse not just the top-line but also the composition: they want to see continued easing in shelter and fewer one-offs in non-housing services, alongside contained goods prices as tariffs dribble through rather than surge.

The most watched lens remains core goods. Pre-pandemic, this category was a steady disinflationary force; tariffs complicate that picture, but PPI hints the pass-through is still gradual. Eyes will be on communication gear, household furnishings, recreation goods, and apparel—tariff-exposed lines where modest firmness is plausible. Autos are the counterweight: cooling new/used car prices would offset tariff creep and help keep core contained. Energy should add only a modest headline nudge; food could stay patchy (beef is a risk), but the magnitude needed to overwhelm the index is large.

Services are the sticky piece. Shelter remains the fulcrum—new-lease indicators point to ongoing disinflation, but the BLS series glides lower rather than drops. A further step-down here is the cleanest path to a friendly core. Auto insurance has been the biggest wild card in non-housing services; any moderation would be a gift. Medical services should normalize from last month’s quirks (e.g., dental). Travel (airfares, lodging) is volatile and could swing either way; capacity and demand trends argue against a persistent flare-up.

What would change the policy conversation?

• Hot scenario: Core ≥0.4% m/m with broad services firmness and clear tariff pass-through in core goods. Odds of 50 bp would rise from ~10%, but the bar for the Committee to actually deliver 50 next week is still high.
• Base case: Core ≈0.3%, headline ≈0.3%. Locks in 25 bp with room for a more dovish Powell, laying groundwork for another 25–50 bp of cuts late 2025 if disinflation and labor softening persist.
• Cool scenario: Core ≤0.2% m/m driven by goods disinflation and softer non-housing services. Reinforces 25 bp now and a gentler 2025 path.

Three things to watch at 8:30:

• Core goods vs. non-housing services: Tame goods + easing services is the green-light combo.
• Shelter step-down: Even a small decel carries outsized signaling power.
• Auto insurance and medical: Stabilization here would validate the “stickiness is fading” narrative.

Bottom line: With PPI easing and jobs revised sharply lower, the burden of proof is on CPI to argue against a cut—and that bar is high. The most probable outcome is a textbook 0.3%/0.3% that keeps the Fed on track for 25 bp next week while enabling Powell to sound more dovish, building the case for additional easing into late 2025. Unless CPI delivers a broad-based upside shock, the inflation scare keeps fading—and the policy pivot stays intact.