With concerns of a recession — or stock market crash — in full swing, next week’s Consumer Price Index (CPI) report represents perhaps the single most important economic data release ahead of the Federal Reserve’s upcoming policy decision. Indeed, the CPI report may offer insight into whether the Fed’s war on inflation is coming to a soft or emergency landing.
After a surprising increase in prices in July, economists are crossing their fingers that price growth cooled in August. The headline CPI rose 3.2% on an annual basis in July, the first acceleration in more than a year. July’s hotter-than-expected inflation has stoked fears that the Fed may push the rate hike button again soon.
As such, next week’s CPI report may force the Fed’s hand at its next policy meeting, Sept. 19-20. With just days between the August CPI and the FOMC meeting, the inflation data will likely prove Fed members’ final consideration before coming to a decision.
And what a decision it will be. Even with fears of an imminent economic pullback eating up Wall Street, members of the Fed still aren’t satisfied with the current 5.5% benchmark rate. At the annual Jackson Hole Economic Symposium last month, Fed Chair Jerome Powell hinted that rates are liable to remain elevated — or even increase — in the foreseeable future.
“We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective,” he said.
Recession Indicators Loom Large
The major concern here is that should inflation come in higher than expected, the Fed may be pressed to raise rates yet again, a possibility that further aggravates recessionary tension in in the U.S. economy. Now, the soft-landers will argue that metrics like unemployment and consumer spending, which typically deteriorate during a recession, have been surprisingly resilient. Which has been true, at least, until recently.
Indeed, the latest jobs report showed a surprising 0.3% increase in unemployment, to 3.8%, the highest level since February 2022. While this is still historically fairly strong, it also offers some validity to those suggesting an interest rate-induced recession is on the way.
“The labor market is clearly cooling, with job openings falling and job growth slowing closer to sustainable levels based on the most recent data, but remains tight,” said Goldman Sachs’ Joseph Briggs.
While 3.8% unemployment isn’t itself bad, it’s the suggestion that it may just be the start of a wider, more malicious downturn that has economists and analysts terrified. There’s some data that suggest that consumer spending has largely been propped up by savings and debt expenditures. In fact, credit card debt recently hit $1 trillion for the first time in history.
Will the CPI Cause a Stock Market Crash?
The fear is that a red-hot inflation report will invite more rate hikes, which will likely invite a slowdown in hiring, which will, in itself, invite a reversal in spending. When consumer spending falls, so do earnings. And when earnings crash, well, so does the wider stock market.
The notion that the economy hasn’t fully digested the full brunt of the Fed’s previous rate hikes is an even more terrifying suggestion, given the overwhelming expectation that the central bank isn’t done raising rates yet. Should everything hit all at once, the notion of a soft landing quickly devolves into an emergency landing as the economy slips into recession.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
