US Inflation Expectations at Bay as Markets Eye Core Services

Market expectations for US inflation have been relatively low ahead of today's report, according to Citi's US Inflation Surprise Index. The index shows that recent years' inflation prints have either met or undershot market expectations, with a trend towards inflation meeting expectations rather than exceeding them.

The Wall Street Journal forecasts range from 0% to 0.16% for the monthly estimate, centred around a median of 0.12%. For the year-over-year estimate, the range is 0.16% to 0.26%, with the median at 0.22%. This leaves a relatively low hurdle for an upside surprise.

Traders will be looking for evidence that inflationary pressures are becoming more entrenched in core services excluding housing, which would provide a read on domestically generated price pressures and labour market conditions. Core goods prices will also be important in assessing whether tariff pass-through is largely complete.

Despite the re-emergence of energy-led inflationary pressures, market pricing for Fed rate hikes out to the June meeting next year has been edging lower in August. According to Fed funds futures, around 44 basis points of tightening is priced over this period, with the September meeting effectively deemed a coin flip.