Wall Street is abuzz ahead of the release of the July consumer price index (CPI) inflation report due this Wednesday, Aug. 14. While equity markets have performed surprisingly well since the global selloff last week, that may stand to change unless investors are pleased with July’s inflation progress. Will the stock market crash?

Well, maybe.

The CPI report represents the first major U.S. macroeconomic news release since the now-infamous July jobs report, which sparked one of the worst global corrections in recent memory. That said, it was surprisingly short-lived. Though the S&P 500 hasn’t returned to its all-time July high, it’s comfortably recovered most of its losses from last Monday’s drop. However, the July CPI may threaten all that.

This time around, economists will look for a clear-cut indicator that prices are coming down. This would confirm that the Federal Reserve will kick off its rate-cutting campaign in September.

Economists expect the CPI to increase 0.2% in July across both headline and core inflation, which excludes Food and Energy. This would keep the annual inflation rate at 3%, the same as in June, while the core inflation rate eases to 3.2%, its lowest level since April 2021.

That said, there’s certainly a margin of error here, especially for the core CPI. In fact, economists think core inflation could increase anywhere between 0.1% to 0.3% in July.

Stock Market Crash Concerns Escalate With September Policy Meeting in View

As always, much of the importance of the CPI lies in the Fed’s reaction to it. While economists overwhelmingly agree there is a high likelihood of a rate cut in September, there is still some debate over the magnitude of the expected rate reduction.

Indeed, according to the CME Fed Watch tool, interest rate traders are pricing in a 45.5% chance of a 25 basis point rate cut and a 54.5% chance of a 50 bp cut. This would bring the terminal rate to a range between 5%-5.25% and 4.75%-5%, respectively.

With the labor market clearly softening, the central bank is expected to act swiftly to bring rates down to avoid a full-blown economic downturn. Markets are currently pricing in a 77% chance of a 1% rate reduction by the end of the year, divided over the last three Fed meetings of 2024.

The July CPI should offer some insight into the Fed’s path forward heading into the final quarter of the year. Should inflation remain elevated, expect equity markets to react negatively to the notion of a slowed rate cut trajectory.

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.

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.