Why the Upcoming CPI Report Is a Bigger Event Than Last Week's Jobs Data

 

Why the Upcoming CPI Report Is a Bigger Event Than Last Week's Jobs Data

**Bank of America says the July inflation data is the "bigger event" for markets and the Fed. Here's why next week's CPI report could reshape the rate outlook more than Friday's soft jobs print.**

---

## Introduction: A Market Rewired

Last week's jobs report was a genuine surprise. The U.S. economy unexpectedly shed **23,000 jobs** in July—the first negative print since the pandemic, with May and June revisions down a combined 103,000 jobs . The unemployment rate fell to 4.1%, but for "bad" reasons: labor force participation dropped to 61.4%, its lowest level since March 2021, as **720,000 people left the workforce** . Weak wage growth (just 0.1% month-over-month and 3.2% year-over-year) added to the dovish signals .

Yet the S&P 500 hit a record high the same day, extending a powerful rally. The market's message was clear: the report was weak enough to keep the Fed on hold, but not weak enough to signal recession.

Now, the focus shifts to Wednesday's Consumer Price Index report—and Bank of America is blunt: **"The Jul CPI report is a bigger event than today's jobs numbers"** . Here's why next week's inflation data matters more.

---

## The Three Fed Pillars: Why CPI Takes Priority

At its July 28-29 meeting, the Fed held rates steady at 3.50%-3.75% for the fifth consecutive meeting . But the decision was anything but unanimous: **three regional presidents dissented in favor of a 25-basis-point hike**—the largest number of dissents in the same direction since 2016 .

That split reflects a central question: which side of the Fed's dual mandate should take priority? Here's the breakdown :

| | | |

|---|---|---|

| **Inflation** | Above 3.5% for years | **Primary concern for hawks** |

| **Labor Market** | Cooling but not collapsing | Secondary concern |

| **The Fed's Mandate** | Price stability & max employment | **Tension at the July meeting** |

Chair Kevin Warsh has repeatedly emphasized price stability, saying the committee has "no tolerance for persistently elevated inflation" . When he took over in June, he made clear that his priority is taming inflation, even if it means keeping rates higher for longer .

**The jobs report does not change that calculus.** Bank of America's Aditya Bhave noted that while the payroll data was "a bit dovish on net," it shouldn't shift the Fed's view that the labor market is balanced and not a source of inflationary pressure .

---

## The Two Numbers That Matter: What We're Expecting

The July CPI report is scheduled for release on Wednesday, August 12 at 8:30 a.m. ET . Here's what economists are watching :

| Metric | Expected | June Reading |

|--------|----------|--------------|

| **Headline CPI (Monthly)** | 0.2% | -0.4% |

| **Headline CPI (Annual)** | 3.5% | 3.5% |

| **Core CPI (Monthly)** | 0.2% | 0.1% |

| **Core CPI (Annual)** | 2.5% | 2.6% |

BMO Economics expects headline inflation to hold steady at 3.5% annually, with gasoline prices acting as a "dampener" . More importantly, core CPI is expected to rise just 0.2%, which would shave the annual rate to 2.5%—matching a five-year low and bringing us close to pre-pandemic norms .

But there's a glaring red flag. The Cleveland Fed's Inflation Nowcasting tool projects headline inflation will cool further—but **core PCE inflation, the Fed's preferred gauge, is expected to reaccelerate to 3.36% in August** from 3.31% in July . That persistent stickiness is what keeps the hawks vocal.

---

## Why This Matters More Than Jobs

**1. The Market Is Pricing the Wrong Risk**

Before the jobs report, traders were pricing in roughly a 57% chance of a September rate hike. After the soft employment data, that probability dropped to about 29% . But as Bank of America's Bhave put it, the Fed's "breakeven" for job growth is now just 20,000 per month—meaning even a weak payroll print doesn't signal a labor market crisis .

**If the CPI report comes in hotter than expected, it would reaccelerate the rate-hike debate more than the jobs data could have.** Markets are currently pricing in a Goldilocks scenario where the labor market cools while inflation fades. A hot CPI print would shatter that narrative.

**2. Fed Communication Is Changing**

Kevin Warsh has deliberately reduced forward guidance. At his June press conference, he shortened the Fed's policy statement and signaled less communication about the path forward . His message is clear: the Fed will react to data, not telegraph its moves.

This means the market no longer has the same "Fed put" it once relied on. Each new inflation print carries more weight because the Fed is less willing to signal its intentions in advance .

**3. The Energy Question**

The July CPI is the first report to fully capture the U.S.-Iran conflict's impact on energy prices. While gasoline prices eased slightly in July—enough to act as a "dampener"—wholesale gasoline prices are now below $3 a gallon . If this trend holds, it could provide meaningful relief. If it reverses, the inflation outlook could darken quickly.

---

## What the Experts Are Saying

| Analyst | View |

|---------|------|

| **Bill Adams (Fifth Third Commercial Bank)** | "The Fed will see the unemployment rate's further decline in July as a reason to look past the month's weak payrolls print and continue to focus on controlling inflation."  |

| **Chris Zaccarelli (Northlight Asset Management)** | "If the data continues to come in higher than expected, it could raise the probability of a rate hike at the Fed's next meeting."  |

| **Bank of America** | "The Jul CPI report is a bigger event than today's jobs numbers."  |

---

## What to Watch For in the CPI Report

Here are the key thresholds to watch :

| Threshold | Market Implication |

|-----------|-------------------|

| **Headline CPI > 0.3% monthly** | Rate hike probability jumps; bond yields rise |

| **Core CPI > 0.2% monthly** | Reacceleration fears; tech stocks vulnerable |

| **Core CPI = 0.2% monthly** | Goldilocks scenario holds; steady rates likely |

| **Core CPI < 0.2% monthly** | Rate cut expectations grow; dovish rally |

---

## The Bottom Line

The July jobs report was a legitimate surprise, but it's not a game-changer for the Fed's inflation calculus. Bank of America and other analysts are clear: **Wednesday's CPI report is the bigger event.**

If the data shows inflation continuing to cool—particularly on the core level—the rate hike debate will fade. But if it surprises to the upside, the three dissents at the July meeting could become the majority view by September.

For investors, the message is simple: the jobs report bought the market some breathing room, but the CPI report will determine whether that room gets filled with relief or regret.