Markets are bracing for key inflation data next week. Analysts say expect a 'knee-jerk' gain if CPI falls but don't bet on the Fed to pivot at its upcoming meeting.

The upcoming US inflation report is expected to show further signs of cooling in consumer prices, data that may provide a short-term boost for a stock market that is still vulnerable to downside pressure.

Investment banks have revised their forecasts for the Federal Open Market Committee's meetings. Bank of America now expects the Fed Funds rate to increase by 75 basis points in September and 50 basis points in November, compared with its previous expectations of 50 and 25 basis points. There will be a 25 basis point rate hike in January.

BofA acknowledges there are risks to a smaller rate hike in September.

Economists expect the Labor Department's August inflation report to show headline inflation of 8.1%. The July and June rates were the highest in 41 years.

Edward Moya, senior market analyst at Oanda, said that the knee-jerk reaction would be positive for stocks. Many investors think that the Fed's job of raising rates may be done sooner.

The Fed is expected to deliver a third consecutive rate increase this month in order to bring inflation down. Four times this year, the Fed has raised rates.

Gas prices have continued to fall since a drop in gasoline prices. As of Friday, the average price of gas in the US was $3.78 a gallon, down from $4.03 a month ago.

Lower gas prices can be helpful, but ongoing supply chain issues and elevated shelter and electricity costs could prove to be a problem for the Fed.

A lot of the inflation is going to be sticky. Inflation is going to fight back. The market is going to have a hard time dealing with the fact that the Fed's job won't be done by the end of the year. Risk appetite will struggle over the next few months.

In August, the reading of consumer prices may be affected by a decline in used car prices.

"On a month-over-month basis, we're going to see negative numbers coming through and with that, inflation expectations should be coming down pretty dramatically." He thinks there will be a discrepancy between policy and actual data.

"Powell is pretty adamant that until inflation gets down closer to that two, two and a half percent range, they're going to be pretty vigilant." While I think there will be some short-term relief on equity markets should we see an increase in inflation, we will have bouts of concerns again with the Fed's tightening. This isn't going to stop anytime soon, and we are not out of the woods.

The Fed Funds rate is expected to be raised by three-quarters of a percentage point.

They raised their forecasts to 75 and 50 basis points, respectively. There is only an "outside chance" that softer-than- expected August inflation figures will swing the pendulum back towards an increase of 50 basis points at the September FOMC meeting, according to a new report.

According to the FedWatch tool, the probability of a hike in the federal funds rate in September rose to 86% on Friday from 57% a week earlier.