So here’s the thing about this week’s inflation report: it’s basically a financial Kobayashi Maru. You know, that Star Trek test where there’s literally no way to win? Yeah, that’s where we are with the July CPI data.
The consensus is expecting inflation to tick up to 2.8% year-over-year from June’s 2.7%. Sounds reasonable, right? Wrong. Because in today’s market, literally any outcome could send stocks into a tailspin faster than you can say “Federal Reserve.”
Scenario 1: Inflation Comes in Hot
If prices jumped more than expected, the market will collectively lose its mind about September rate cuts getting yanked off the table. Right now, traders are pricing in an 86.5% chance the Fed cuts rates next month – down from over 90% just last week. A spicy CPI reading would crater those odds faster than a crypto influencer’s credibility.
Plus, everyone’s paranoid that Trump’s tariffs are finally starting to bite consumers in the wallet. Nothing says “economic anxiety” like your morning coffee costing more because of trade policy.
Scenario 2: Inflation Comes in Cold
But wait, there’s more! If inflation drops too much, that’s somehow also terrible news. Because apparently, falling prices now mean the economy is slowing down so fast that businesses can’t even raise prices anymore. It’s like being worried your car is going too slow while also being worried it’s going too fast.
Michael Brown from Pepperstone basically summed up the market’s mood: damned if you do, damned if you don’t. Though he thinks a hot reading would be worse for stocks, since it kills the rate cut party everyone’s been planning.
The Fed’s Impossible Position
Jerome Powell is probably somewhere right now, staring at economic data and wondering why he didn’t just stick to being a lawyer. The guy’s caught between inflation hawks who remember the 2021-2022 price surge and doves who are freaking out about July’s weak jobs report.
Deutsche Bank’s Justin Weidner thinks even a cooler-than-expected reading could backfire, potentially forcing the Fed into a jumbo 50 basis-point cut – which sounds good until you realize it would signal they’re genuinely panicked about the economy.
The Real Talk
Here’s what’s actually happening: markets have gotten so addicted to the idea of rate cuts that any threat to that narrative feels like the end of the world. We’ve basically trained investors to expect monetary policy to solve every problem, and now they’re having withdrawal symptoms.
Natalie Gallagher from Board expects inflation to hit 2.9% – hotter than consensus – and thinks this could be the start of a longer trend as tariffs work through the system. Her take? If inflation doesn’t show up, it means demand is so weak that businesses can’t raise prices, which is “a troubling signal for US growth.”
So there you have it: inflation up is bad, inflation down is bad, and inflation staying the same probably means we’re all doomed too. Welcome to 2025, where every economic data point is simultaneously a reason to panic and a reason to celebrate, depending on which Twitter thread you read first.
The only certainty? Powell’s Jackson Hole speech later this month is going to be more scrutinized than a Supreme Court nomination. Because apparently, that’s where we are now – hanging on every word from central bankers like they’re fortune tellers with PhD’s in economics.
Buckle up, folks. It’s going to be a bumpy ride to September.