Is CPI the final act in a dovish opera

Markets are lining up for tonight’s CPI like punters outside a prize fight, except nobody’s really sure if the main event is a knockout or a damp clinch. We’ve just come through two weeks of dovish fireworks — Powell’s Jackson Hole lullaby, the grotesque payroll revisions that pulled a million phantom jobs out of Biden’s spreadsheet drawers, and a PPI report that looked like deflationary fog rolling across the field. The Fed is already locked into a 25bp cut next week, and the betting windows have even started pricing a 50 with a 15% chance. CPI is the last card in the deck before the dealer calls.

But let’s not kid ourselves — this is less about the number and more about how traders choreograph the reaction. On paper, headline CPI is pencilled at +0.3% month-on-month, core at the same clip, annual rates grinding toward 2.9% headline and 3.1% core. That’s the official hymn sheet. The problem is, hymn sheets are usually wrong. Distribution curves centred at 0.3% scream consensus, but experience tells us prints love to wander into the margins — often lower, when everyone leans higher. Not a bad strategy, considering how poor the forecasters have been—well, at least the consensus print around the ones Bloomberg polls.

( In my probability matrix, I tend to use Douglas Porter and Scott Anderson, two Chief Economists at BMO Financial Group. Douglas Porter is the Chief Economist for BMO Canada, and Scott Anderson is BMO's Chief U.S. Economist.

The components are the familiar rogues’ gallery. Used cars make their seasonal comeback, insurers keep raising premiums like toll collectors on a bridge no one can avoid, airfares jump under the weight of holiday distortions, and tariffs sneak through the back door, slapping price tags on furniture, parts, and apparel. Tariffs alone could tack on 14 basis points to core — an artificial garnish on an otherwise cooling dish. Strip them out and you’re staring at trend inflation barely kissing 2% annualized. That’s not exactly the stuff of hawkish nightmares.

The real question is how the tape reacts. Implied volatility has collapsed — the CPI straddle is pricing less than 60bps of S&P move, the tightest leash this year. Traders are walking into the print with one of the best 100-day Sharpe ratios ever recorded. That should set off alarm bells — when everyone’s too comfortable, the market gods usually throw a curveball.

Still, the playbook feels asymmetric. A hot print, north of 0.4%, might spook equities by 1.5–2%, but the probability sits in single digits. A middle-of-the-road 0.3–0.35% outcome leaves the S&P marking time, maybe a modest uptick. A cooler-than-expected 0.25–0.3% unleashes a rally, and anything sub-0.25% forces traders to re-price September for a possible 50bp slashing. The tails look skewed to the upside, but the market will be quick to fade tariff noise and look through it.

For bonds, the counsel is clear: don’t chase a knee-jerk selloff if headline surprises high. Once the tariff smoke clears, the underlying disinflationary trend reasserts, and the curve bull-steepens. Breakevens may twitch, but they’ll give way as OER and rents cool further into year-end. FX is where the asymmetry narrows — dollar upside is limited, as the Fed’s reaction function has already been softened. Even if the greenback pops on a hot number, the backdrop screams “sell into strength.”

And if you zoom out, the macro scaffolding still favors risk: fiscal impulse is alive, credit impulse reviving, leverage rebuilding, immigration juicing nominal GDP, and both monetary and fiscal policy set to spray liquidity into 1H26. In other words, unless the labor market collapses — and that requires three ugly NFPs in a row — the stage is still set for one more bubble act, complete with AI/robotics narrative and duration-friendly inflation.

So how to trade it? Expect noise, lean into the structural path. If the number lands hot, fade the dollar pop and buy duration into the selloff. If it cools, risk runs higher and the dollar softens further. The key is not whether CPI hits 0.3 or 0.36, but that half the inflation we’re staring at is tariff smoke and mirrors. The Fed knows it, the market knows it, and that’s why this CPI feels less like a turning point and more like the final act in a dovish opera already scored in advance.