Don’t be fooled by a drop in headline inflation in the United States. Markets will be tuned for another number on Wednesday.

Traders, investors and economists are all counting on Wednesday’s Consumer Price Index report to show a drop in the annual rate of inflation in the United States for July. But there’s another number buried in the consumer price index data that has the propensity to rattle markets.

This is called the year-over-year core CPI reading, a measure that removes volatile food and energy costs. It stood at 5.9% for the 12 months to June, and the consensus is that it will hit 6.1% year-on-year in July. Gargi Chaudhuri of BlackRock Inc., the world’s largest fund manager, sees the core reading rising a little higher still, to 6.2%, while two Goldman Sachs analysts warn that the US inflation chart short term “is likely to remain uncomfortably high.

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A rise in the annual base rate of the CPI would be significant as it would be seen as reflecting the true underlying trend in inflation – while dashing widespread hopes in financial markets over the past month that price gains have reached a peak. Many traders and investors have generally latched on to the headline CPI annual rate for July – and the idea that it is about to fall to 8.7% or 8.8%, from a high of almost 41 years by 9.1% in June, after taking into account recent declines in gas and commodity prices.

See: U.S. consumers were likely relieved by meteoric price increases in July, but the Fed won’t feel any better

“The outlook for inflation remains the primary concern for investors,” Tony Roth, chief investment officer of Wilmington Trust Investment Advisors, and Luke Tilley, chief economist, wrote in an email Tuesday. “Persistent inflation is weighing on consumer and business sentiment, but economic data remains quite mixed and concerns are high that aggressive Fed policy could push the United States into recession.”

“While we still expect inflation to ease going forward, some components will remain stubbornly elevated and complicate the outlook,” they said.

Signs of widespread financial market expectations that inflation is about to ease are evident: US stocks have generally rebounded from their mid-June lows, although they fell on Tuesday afternoon. Meanwhile, medium- and long-term Treasury yields have fallen from their June highs – along with break-even rates, according to Tradeweb data.

In the 24-hour currency market, where the dollar remains sensitive to U.S. data surprises, “the market must decide whether the headline slowdown is more important than a strong, sticky core,” Securities strategists said. TD Oscar Munoz, Mazen Issa and Gennady Goldberg.

At Pennsylvania-based Hirtle Callaghan & Co., which oversees about $20 billion in assets, Brad Conger, deputy chief investment officer, said he believes inflation and the Federal Reserve’s desire to attacking them were both underestimated. Conger sees inflation growth shifting away from goods to services, while noting how difficult it is to “rip off” price knowledge once inflation sets in.

“Let’s say you work at a company of 1,000 people,” Conger wrote in an email. “In May, 28 of your co-workers resigned and accepted new offers…Your employer is granting everyone else the 3.6% economy-wide average hourly wage increase at an annualized rate . But here’s the catch. The 972 employees who remained know precisely what the departures accepted in their new position. It became their new job reserve price. This is how inertia develops in inflation and why it is so difficult to eradicate.

“Rent works the same way,” the deputy investment manager said. “A small proportion of new tenant leases appear average, but everyone knows what the effective new rent is.”

On Tuesday afternoon, the three main stock indices DJIA,
-0.35%

SPX,
-0.63%

COMP,
-1.39%
were down as investors were reluctant to make big trades ahead of Wednesday’s CPI data. Meanwhile, the Treasury curve inverted deeper as the spread between 2- and 10-year yields narrowed to an intraday low of nearly minus 50 basis points, with the rate at 2 years TMUBMUSD02Y,
3.263%
rising at a faster rate than the 10-year rate TMUBMUSD10Y,
2.800%.

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