Two key inflation reports this week will help determine the size of the Fed's rate cut.

The US Federal Reserve is taking a final look at inflation readings this week before deciding the size of a widely expected interest rate cut soon.

On Wednesday, the Labor Department’s Bureau of Labor Statistics will release its Consumer Price Index report for August. The following day, the BLS will release its Producer Price Index report, also for August, a measure used as a proxy for costs at the wholesale level.

With the question of whether the Fed will cut interest rates when it concludes its next policy meeting on September 18 all but settled, the only question now is how much. Friday’s jobs report didn’t provide much clarity on that issue, so we’ll leave it to the CPI and PPI readings to hopefully clarify things.

“Inflation data has taken a back seat to labor market data in terms of influencing Fed policy,” Citigroup economist Veronica Clark said in a note. “But with markets — and perhaps Fed officials themselves — divided on the appropriate size of the first rate cut on Sept. 18, August CPI data could still be an important factor in the upcoming decision.”

Dow Jones forecasts a 0.2% increase in the CPI, both for all items and the core, which excludes volatile food and energy items. On a year-over-year basis, that would translate into inflation rates of 2.6% and 3.2%, respectively. The producer price index is also expected to rise 0.2% for both the headline and core. Fed officials generally focus on the core as a better indicator of longer-term trends.

At least for the CPI, the readings aren’t particularly close to the Fed’s 2% long-term target, but there are some important caveats to remember.

First, while the Fed pays attention to the CPI, it is not the primary measure of inflation. That measure is the Commerce Department’s personal consumption expenditures price index, which recently put the headline inflation rate at 2.5% in July.

Second, policymakers care about the direction of price movements as much as they care about the absolute value, and the trend over the past few months has been a clear slowdown in inflation. In general prices in particular, the 12-month CPI forecast for August will represent a 0.3 percentage point decline from July.

Finally, Fed officials’ focus has shifted from taming inflation to growing concerns about the state of the labor market. Hiring has slowed sharply since April, with the average monthly increase in nonfarm payrolls falling to 135,000 from 255,000 in the prior five months, and job openings have also declined.

As the focus on employment intensifies, expectations have grown that the Federal Reserve will begin cutting interest rates. The benchmark federal funds rate is currently 5.25% to 5.50%.

“The August CPI report is expected to show further progress in returning inflation to the Fed’s 2.0% target,” wrote Dean Baker, co-founder of the Center for Economic and Policy Research. “Barring some unusual surprises, this report should not contain anything that would dissuade the Fed from cutting interest rates, perhaps by a large margin.”

But markets appear to have come to terms with the Fed starting slowly.

Futures market prices on Tuesday indicated a 71% chance that the rate-setting Federal Open Market Committee will begin its easing campaign with a quarter-percentage-point cut, and just a 29% chance of a more aggressive half-percentage-point cut, according to CME Group’s FedWatch.

But some economists think this may be wrong.

Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, cited the overall decline in employment alongside large downward revisions to payrolls in previous months, and believes that “the summer slowdown will look more acute in a few months,” and that the downward trend in employment “still has a long way to go.”

“We are therefore disappointed — but not surprised — that FOMC members who spoke after the jobs report but before the pre-meeting blackout still leaned toward easing policy by 25 (basis points) this month,” Toombs said in a note on Monday. “But by the November meeting, with two more jobs reports in hand, the case for a rapid rate cut will be overwhelming.”

In fact, market prices are pointing to a tepid start to the cuts in September, but expect a half-point cut in November, and possibly another cut in December.