Important inflation reports this week expected to show prices still on the rise

Key inflation reports this week are expected to show that prices accelerated again in August, though not in a manner that would keep the Federal Reserve from reducing its benchmark interest rate at a meeting next week.

The Bureau of Labor Statistics is scheduled to release the producer price index for August on Wednesday, followed by the more closely watched consumer price index the next day.

Economists expect the reports to show monthly increases of 0.3% across the board, including the headline all-items indexes as well as the critical core readings that exclude volatile food and energy prices, according to Dow Jones.

If that is the case, it would push the annual headline CPI rate to 2.9%, the highest level since January, and further from the Fed’s 2% target and up 0.2 percentage point from July. On its face, that would seem to be a deterrent for the Fed to ease monetary policy when it meets next week.

However, two factors will come into play: First, the core reading is predicted to be unchanged at 3.1%. Second, the increase in inflation is largely expected to come from tariff-sensitive goods rather than services prices that affect a much larger part of the $30 trillion U.S. economy.

If those trends are apparent in the report, central bank policymakers are expected to look through the increase and turn their attention more to the increasingly weak jobs market that could use a boost from lower rates. Fed officials for now are mostly viewing tariffs as one-off price increases not likely to cause longer-lasting inflation.

“In aggregate, it’s still hotter than the Fed would like to see,” said James Knightley, chief international economist at ING. “They’ll be looking at the broader picture. The U.S. is predominately a service sector economy.”

To be sure, President Donald Trump’s tariffs are likely to show up further in the inflation picture in the form of price increases for items such as autos, furniture and clothing, among other items.

However, “aside from tariff effects, we expect underlying trend inflation to fall further, reflecting shrinking contributions from the housing rental and labor markets,” Goldman Sachs economists said in a note.

That’s a double-edged sword for the economy, though, as consumers feel the pinch from falling housing values and wages that aren’t rising as quickly, providing another incentive for interest rate cuts.

“When you get that combination, concerns about prices, concerns about incomes, concerns about wealth, those three things coming together are pretty toxic for the growth story,” Knightley said. “That’s starting to make the Fed more wary about where we’re heading.”

Producer prices, which will report ahead of CPI, are considered an indicator of pipeline pressures. Despite rising 0.9% in July, the increase is expected to be tempered in August.