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Wednesday’s consumer price index report could hand the Federal Reserve some valuable breathing room, but another inflation surprise would quickly revive pressure for higher interest rates. Financial markets are bracing for a release that could reshape expectations for the rest of the year.

The Bureau of Labor Statistics will publish the July figures at 8:30 a.m. Eastern time. According to the Dow Jones consensus, economists expect the headline index to rise 0.1 percent from June, while the core measure excluding food and energy is projected to increase 0.2 percent.

On an annual basis, headline inflation is expected to ease to 3.4 percent, with core inflation slowing to 2.5 percent. Both would decline by 0.1 percentage point from June, although they would remain uncomfortably above the Fed’s 2 percent target.

“If we get a July CPI report anywhere near my forecast, the balance of the committee is going to look right through the supply shock, and the FOMC will remain on hold for the remainder of the year,” said Joe Brusuelas, chief economist at RSM. He said the report could provide “something of an assist” for Fed Chairman Kevin Warsh.

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Warsh has faced a difficult policy landscape since taking the position in May. The central bank must weigh persistent price pressures against indications that the labor market and broader economy may be losing momentum.

At its July meeting, the Federal Open Market Committee voted 9 to 3 to keep its benchmark borrowing rate within a range of 3.5 percent to 3.75 percent. All three dissenters supported a quarter percentage point increase, while Governor Lisa Cook has indicated that a hike may be necessary if inflation refuses to cooperate.

Market expectations have shifted as recent inflation data appeared less threatening and tensions in the Middle East showed intermittent signs of easing. Traders now assign roughly even odds to a September increase, with October or December viewed as more likely possibilities, according to the CME FedWatch gauge.

Fed officials will receive both July and August inflation reports before their next policy decision. The central bank does not hold a regular August meeting because the Kansas City Fed hosts its annual symposium in Jackson Hole, Wyoming.

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“If you’re not confused, you’re not paying attention,” Brusuelas said. “That’s a good synopsis of where we’re at here in mid-August.”

June delivered some relief, with headline consumer prices falling 0.4 percent from the previous month and core prices holding flat. Lower energy costs and moderating shelter expenses accounted for much of that improvement, giving policymakers a reason to wait for additional evidence.

The labor picture has also become harder to read after nonfarm payrolls declined by 23,000 in July, even as unemployment slipped to 4.1 percent. A weakening employment market would normally argue against tighter monetary policy, but inflation remains the central bank’s more immediate problem.

Bank of America continues to forecast three rate increases in the coming months. Its economists said the July employment report “didn’t change the overall picture on the labor market — it’s stable. And more importantly, the Fed’s reaction function is heavily skewed towards the inflation data as noted by recent Fed speak.”

The bank said that if the Fed’s preferred inflation measure averages monthly gains of 0.25 percent during the next two months, “it is all but guaranteed that the Fed will begin hiking rates in September.” An average below 0.2 percent would probably postpone action.

Anything between those levels would leave September as “a coin flip,” according to the firm. The outcome would depend on Warsh and “whether recent news reports that suggested he is open to hikes if needed are true or if the dovish commentary from the July press conference is more in line with his reaction function.”

A hotter report could leave the committee considering several increases rather than a solitary adjustment. Cleveland Fed President Beth Hammack said, “I don’t know exactly where we’ll end. I would I would say in general, one 25-basis-point move probably doesn’t do do a whole lot for the economy. So, it’s probably, you know, some some number of movements, but I don’t want to prejudge what that number is going to be.”

Hammack added, “I’m squarely focused, because we have this stability in the labor market, that we can bring inflation back down to target.” For investors, Wednesday’s figures could therefore move Treasury yields, the dollar, equities, gold and other rate sensitive assets as markets reassess how much patience the Fed can afford.

DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.