Everything you need to know about the US inflation report

Markets have staged a V-shaped rally on expectations of decelerating US consumer prices in August.

Here's everything you need to know going into tonight's inflation print, which will be announced at 10:30 pm AEST.

Consensus expectations

The CPI print is expected to show a -0.1% month-on-month decline, the first in two years thanks to falling energy prices. On a year-on-year basis, headline inflation is expected to fall to 8.1% from 8.5% in July.

Core inflation - which excludes volatile segments including food and energy - is forecast to rise 0.4% month-on-month but remain unchanged compared to a year ago, at 5.9%.

Elsewhere, US consumer expectations fell even further in August thanks to lower gasoline prices. Consumer expect inflation to be around 5.75% over the next 12 months from 6.2% in July, the lowest since October 2021, according to Bloomberg.

Over the next three years, inflation expectations sat at 2.8%, the lowest since 2020.

Source: Bloomberg

Peak inflation: A rather uneven one

Gasoline prices, airfares, shipping and used cars are the rather 'low hanging pieces of fruit' to suggest inflation has peaked.

Gasoline prices have fallen for approximately 87 days in a row, the longest consecutive decline in more than three years. Gasoline futures are down -43% from June peaks of US$4.32 to now US$2.46.

Used cars prices fell -4% month-on-month in August, one of the largest declines on record, according to Carson Investment Research.

Source: Carson Investment Research

Still, the Wall Street Journal quoted Harvard Business School professor, Alberto Cavallo who said "we are experiencing a slowdown driven by the decline in fuel prices, but there is still significant upward pressure in such important categories as food, household items and healthcare products."

"We are not out of the woods yet," he added.

A still-aggressive Fed

The Fed is expected to remain aggressive in its fight against inflation.

Speaking at the Cato Institute last Friday, Fed Chair Jerome Powell said "history cautions strongly against prematurely loosening policy. I can assure you that my colleagues and I are strongly committed to this project and we will keep at it until the job is done."

CME's Fedwatch tool currently sees an 88.0% likelihood that the Fed will hike rates by 75 bps in September. By February next year, US rates are expected to be somewhere between 3.75% to 4.25%.

Source: CME Group

S&P 500 performance on CPI print

Year-to-date, 6 out of 8 inflation prints have been hotter-than-expected. The S&P 500 fell every time inflation surprised to the upside, falling an average -1.26%.

The CPI print in January (for last December inflation) was the only one that was in-line with expectations and the S&P 500 rose 0.28% on the day.

The latest print in August (for July inflation) came in cooler-than-expected and the S&P 500 rallied 2.15%.

US-based Leuthold Capital makes an interesting point that "during each of the previous seven major inflation cycles, after the annual inflation rate peaked, the stock market essentially bottomed out."

"Consequently, based on the big inflation cycles of the last 100 years, the current stock market low is already in, because the inflation rate has already peaked."

Perhaps a little optimistic. Now, we just need to see a soft landing.