US CPI, where the significant meets the silly: McGeever

ORLANDO, Florida, Sept 10 (Reuters) - Is it too cliched to say that the next U.S. inflation report will be the most important since the last one? Maybe, but the consumer price index (CPI) data for August is shaping up to have a hugely significant bearing on Federal Reserve policy, potentially sealing the case for an interest rate rise next week and the resumption of a monetary tightening cycle. The prospect of one data point having such an outsized impact on Fed policy is puzzling, given that Fed Chair Kevin Warsh said in his [Jackson Hole speech](https://www.federalreserve.gov/newsevents/speech/warsh20260828a.htm) that policymakers shouldn't rely on "isolated data points" and that "trends matter most." Plus, CPI isn't even the Fed's favored measure of inflation — that's the annual rate of change in the personal consumption expenditures (PCE) index. That the decision to raise the most important central bank policy rate in the world could boil down to the second, or even third, decimal place in a month-on-month inflation figure just adds to the circus. But here we are. A confluence of events — huge uncertainty around Fed communications, Warsh's rocky start to his tenure, a bond market rout, and some curveball signaling from influential Governor Christopher Waller — has dramatically raised the stakes around the Bureau of Labor Statistics' August CPI report, due at 8:30 a.m. ET (1330 GMT) on Friday. The consensus estimates in a Reuters poll of economists for the four key numbers are: monthly headline and core inflation of 0.4% and 0.2%, respectively; annual headline and core inflation of 3.4% and 2.4%, respectively. Speaking at a Reuters event last week, Waller said that if inflation "comes in hot", he would consider voting for a rate hike at the Fed's September 15 to 16 policy meeting. But what would constitute "hot"? A monthly core print of 0.2% in line with consensus wouldn't cut it, and would likely give sufficient cover for the Federal Open Market Committee to sit tight and, to quote Waller again, "give disinflation a chance." On the other hand, 0.4% core would clearly be "hot" and would tip the balance for Waller and probably many of his colleagues on the FOMC. But would 0.3%? And what difference, if any, would it make if the figure was 0.251% or 0.349%? After all, both would be rounded to 0.3%. Or, would a month-on-month rise of 0.251% seal the deal for a hike, but 0.249% signal no change? It seems faintly silly to be drilling down to the third decimal place. But many economists' month-on-month CPI estimates are to the second decimal point, and you can be sure the figures will be sliced and diced in every way possible after their release. Part of the problem is the communications void that has mushroomed since Warsh took the hot seat at the end of May. This is ironic, given that he vowed to simplify and improve communication. But Warsh has been reluctant to reveal his thinking on the Fed's "reaction function", how the central bank will adjust policy depending on changes in inflation and employment. He has been even more vehement in his disdain for "forward guidance" — clearer signals or commitments on the path for interest rates — yet that is exactly what a growing clutch of Fed officials have ended up giving. Tim Duy, chief U.S. economist at SGH Macro Advisors, says Waller's remarks last week made the September meeting "heavily data-point dependent". This surely isn't the direction Warsh wants to take the Fed. But critics say he has allowed the fog around communication and the central bank's reaction function to thicken, leaving markets increasingly confused. Waller's input last week wasn't particularly helpful either, economists say. Of course, one could argue that the decision to raise rates will ultimately be rooted in the multi-month trends on both sides of the Fed’s mandate, regardless of whether this one data point tips the scale. But if CPI comes in slightly “cool” and forestalls a hike, that argument will be harder to support given that the U.S. is at full employment and inflation has been above target for five and a half years. Rates traders are now leaning 65-35 towards a rate hike next week. Watch those decimal places.

US CPI, where the significant meets the silly: McGeever

CPI report could sway Fed policy

Consensus and what would count as hot

Communication gap around the Fed's reaction function

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