US CPI data set to point to sticky inflation as tariff pressures persist

• The US Consumer Price Index is set to rise 2.9% YoY in August, at a faster pace than July's 2.7% increase.
• The Fed is widely expected to cut the policy rate by 25 basis points next week.
• August inflation data could significantly influence the US Dollar's valuation.

The United States (US) Bureau of Labor Statistics (BLS) will publish the all-important Consumer Price Index (CPI) data for August on Thursday at 12:30 GMT.

Markets will look for fresh signs of how US President Donald Trump's tariffs are feeding through to prices. Therefore, the US Dollar (USD) could experience volatility on the CPI release, as the data could influence the Federal Reserve's (Fed) interest rate outlook for the remainder of the year.

What to expect in the next CPI data report?

As measured by the change in the CPI, inflation in the US is expected to rise at an annual rate of 2.9% in August, after having recorded a 2.7% increase in July. The core CPI inflation, which excludes the volatile food and energy categories, is forecast to rise 3.1% year-over-year (YoY), matching the previous month's increase. 

Over the month, the CPI and the core CPI are both seen advancing by 0.3%.

"We expect the August CPI report to show that core inflation gained additional speed, as goods prices continue to reflect gradual tariff passthrough and despite services inflation likely easing at the margin owing to still favorable trends in shelter," analysts at TD Securities said. " A firmer core should result in a jump for total CPI at 0.4% m/m as both energy & food prices likely also gained momentum in August," they added.

How could the US Consumer Price Index report affect the US Dollar?

Heading into the US inflation showdown on Thursday, investors remain convinced that the Fed will opt for a 25 basis points (bps) reduction in the policy rate in September. According to the CME FedWatch Tool, markets are currently pricing in about a 92% probability of a rate cut at next week's meeting. 

Still, comments from Fed policymakers ahead of the blackout period highlighted a difference of opinion regarding the inflation outlook.

Chicago Fed President Austan Goolsbee argued that inflation might be picking back up, and Minneapolis Fed President Neel Kashkari said that goods inflation is rising because of tariffs and added that they need to watch tariff-related price developments to see if they lead to persistent inflation. 

Conversely, San Francisco Fed President Mary Daly noted that she thinks tariff-related price increases will be a one-off and that policymakers will be ready to cut rates soon. On a similar note, Fed Governor Christopher Waller said that they know there will be a "a blip of inflation" but argued that it is unlikely to be permanent, with inflation returning closer to 2% in about six months.

Although a 25 bps Fed rate cut in September is nearly fully priced in, a significant surprise in the inflation data could cause investors to reassess the number of possible rate cuts in the remainder of the year.

The CME FedWatch Tool shows that there is about a 70% chance that the Fed will lower the policy rate by a total of 75 bps by the end of the year. 

Markets could lean toward a 50 bps total reduction if the monthly core CPI comes in above the market expectation. In this scenario, the USD is likely to gather strength against its rivals in the near term. On the other hand, a soft reading could reaffirm three rate cuts and hurt the USD. 

Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for the USD Index and explains:

"The near-term technical outlook points to a slightly bearish bias for the USD Index. The Relative Strength Index (RSI) indicator on the daily chart moves sideways below 50 and the 20-day and the 50-day Simple Moving Averages (SMAs) converge slightly above the price."

"In case the USD Index stabilizes above 98.10 (20-day SMA, 50-day SMA) and starts using this level as support, it could face the next resistance at 98.65 (100-day SMA) before 100.00 (round level, static level). On the downside, support levels could be spotted at 97.00 (static level, round level) ahead of 96.60 (static level) and 96.00 (static level, round level)."