Notable Index Teases CPI Deflation, Backing Our View on This Holding

*Ahead of Wednesday's August CPI report, Adobe brings some encouraging price findings

*Adobe’s Digital Price Index for August fell year over year and compared to July

*While encouraging, online sales are still a relatively small part of the overall inflation equation

The market has see-sawed back and forth on Tuesday and it will soon focus on what new insights or lack thereof can be had from tonight’s debate. But on Wednesday morning, it will be the August CPI that matters.

The core inflation figure for the month is expected to remain unchanged at 3.2% year over year and 0.2% month over month. An unchanged reading would suggest inflation has once again become sticky. But, as we’ve discussed before, comments found in the August PMI reports from ISM and S&P Global SPGI suggest those August figures could be up compared to July’s. But other data from Adobe ADBE and its Digital Price Index (DPI) shows declines in several areas on both year-over-year and month-over-month bases.

Per that data, the DPI fell 4.37% across all categories led by declines in electronics, furniture, bedding and toys. Not rose more slowly but fell year over year and month over month. That, folks, sure sounds like deflation and if we see that in tomorrow’s CPI, it would be warmly welcomed by the market.

But, as much as we would like to see that, we assign it a low probability of happening given the other factors that go into the CPI data. Still, it does back our view that consumers are likely turning to Amazon AMZN and other digital shopping platforms to extend their shopping dollars.

One figure that stood out to us was the 3.7% month-over-month drop in grocery, which reflects online grocery prices. It stood out because, per Adobe, that was the largest decline since the firm began tracking the numbers in 2014.

Grocery prices have been a pain point for consumers and, while it’s good to see some relief in those figures, there are a few things worth noting. First, online grocery shopping accounts for about 12% of the national total. Second, while prices swing more dramatically than they do for in-store purchases, the overall direction has tended to be similar.

This suggests consumers are starting to get some relief, while the overall report suggests we should see Wednesday's August CPI report continue to make progress toward the Fed’s inflation target. The question we’re pondering is how much of that is due to actual price declines vs. a greater use of discounting and sales to win shoppers’ dollars. Either way, it means we will continue to focus on margin-related comments as we move through the current investor conference wave.

Once we have tomorrow’s August CPI findings in hand, the next data set to focus on will be Thursday’s August PPI report. Currently, the market is leaning toward the Fed kicking off a rate-cutting cycle with a 25-basis point trim next week. The larger question is whether the Fed will get on board with 100-125 basis points in cuts before the end of this year, as depicted in the CME FedWatch Tool. Coming off yesterday’s latest update for the Atlanta Fed’s rolling GDP forecast to 2.5% for the current quarter, the odds of the Fed pushing back on such aggressive expectations are high. If that is the outcome we get, we could see the market repeat its April sell-off, and that risk means continuing to walk a patient and prudent path with the Portfolio.

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At the time of publication, TheStreet Pro Portfolio was long AMZN.