A key inflation report is looming, but it’s possible that the July data paints a dismal picture of the economy whether it shows prices rose or fell.

The July consumer price index report is expected to show that prices rose 0.2% last month and 2.8% year-over-year.

The consensus expectations reflect a slightly hotter pace of inflation from the prior month, with consumer prices rising 2.7% year-over-year in June.

Rising inflation is bad, but there’s a chance that falling inflation is taken as a dire warning, as well, sources told Business Insider.

Here’s the logic:

• If inflation comes in too hot, that will undermine the possibility that the Fed could cut interest rates in September. The Fed resuming rate cuts is a major bullish catalyst that the market has been looking forward to for months.

  Hotter-than-expected inflation could also be construed as a sign that President Donald Trump’s tariffs are finally starting to raise prices for consumers, which will stoke concerns about the health of the US economy.

• If inflation comes in too cold, that would compound some of the evidence that suggests the US economy is slowing, something that markets have been fretting over since the July nonfarm payrolls report showed weak job growth in the month, as well as sharp downward revisions for the prior two months.

In either case, stocks could see a negative reaction following tomorrow’s CPI print, Michael Brown, a senior research strategist at Pepperstone, told Business Insider.

Brown said he believed the larger downside risk to equities was if inflation came in too hot. If inflation comes in colder-than-expected, any following sell-off could be short-lasting, he said, as investors will quickly pivot their attention to Fed rate cuts on the horizon.

“If we get a hot number, all of a sudden there’s a lot of doubts around that September meeting, and we’re suddenly looking at probably some headwinds to equities as we price in a slowdown in the economy,” he told BI.

Investors began to price in a September Fed rate cut with more certainty after the job market proved to be much weaker than expected in July. Markets see an 86.5% chance the Fed could cut rates a quarter-point in September, according to the CME FedWatch tool, down slightly from 90.4% last week.

Justin Weidner, an economist at Deutsche Bank, also sees a potential negative reaction in the market no matter what CPI does tomorrow.

If inflation comes in higher than expected, that makes the calculus for a Fed rate cut in September “more tricky,” he told BI.

But if prices are cooler than expected, it be enough cause for concern about the economy to prompt the Fed to issue a jumbo-sized 50 basis-point rate cut in September.

“On the flip side, if it’s kind of weaker, weaker than expected, you have some pullback,” Weidner added of the potential reaction in stocks.

Natalie Gallagher, principal economist at Board, also saw the risks to tomorrow’s CPI report cutting both ways.

Gallagher said she expected inflation to be 2.9%, hotter than consensus estimates. That will likely “mark the beginning of a longer trend,” she said in a note, pointing to concerns that inflation could begin to lift off as tariffs work their way through the economy.

“The real surprise would be if these pressures don’t show – that would suggest demand is softening to a point that businesses can’t raise prices, which is a troubling signal for US growth,” she said.

The outlook for Fed rate cuts will largely depend on the trajectory of inflation in the coming months, Brown said. Markets will also be paying close attention to Fed Chair Powell’s comments, particularly at Jackson Hole, where the central bank hosts its annual summer symposium.

There’s a chance investors could be getting too complacent about expecting Fed rate cuts, Brown said, pointing to high odds markets see for a September cut.

“I’m sort of 50-50 as to whether they pull the trigger in September,” Brown said. “You’d say maybe they should, but then this is a Fed that has been bitten already relatively recently by inflation that ran away from them, frankly unexpectedly, and I think that memory is still going to be quite fresh in the mind.”