US Inflation Data on Wednesday to Provide Clues on Fed Rate Path

Financial markets are awaiting the release of US inflation data on Wednesday, looking for clues on the Federal Reserve's interest rate path. The July Consumer Price Index (CPI) is expected to show a modest increase in prices, with economists surveyed by Dow Jones predicting headline inflation to rise 0.1% month-on-month and core inflation to increase 0.2%. Although both readings remain above the Fed's long-term 2% inflation target, another month of subdued price growth could strengthen the case for policymakers to keep interest rates unchanged.

Investors are repositioning ahead of the data release, with CME's FedWatch tool showing roughly an even chance of a rate increase at the Fed's September meeting. Analysts believe the July inflation report is unlikely to show a dramatic shift, but it will be closely scrutinised for signs that price pressures continue to ease.

A stronger-than-expected reading could trigger a sell-off in equities as investors revive expectations of tighter monetary policy, while continued moderation in inflation could reduce the need for additional tightening. Joe Brusuelas, chief economist at RSM, said a report broadly matching expectations would likely reinforce the Federal Open Market Committee's decision to remain patient.