Wednesday’s Consumer Price Index (CPI) represents the next opportunity for the Federal Reserve to make apparent headway in its long and hard-fought battle with inflation. What should you expect this week?
Well, at the very least, some deflation. Indeed, after nine rate hikes this cycle, inflation is well below its peak and expected to fall, albeit far from the Fed’s long-stated 2% goal.
Comparing February’s Data
This time around, most economists are expecting prices to have eased up from February, if only mildly. For March, economists predict prices rose 0.3% from the month prior, representing a 5.2% annual inflation rate. This is well below the 6% yearly inflation recorded in February.
While this is promising beforehand, it also means the report has that much more to live up to, to be considered a success in the eyes of the markets. Economists and investors are likely crossing their fingers ahead of Wednesday’s report, understanding that another stubborn inflation reading will set the stage for the 10th rate hike this cycle at the Fed’s upcoming May Federal Open Market Committee (FOMC) meeting.
If you recall, in February prices increased 0.4% month-over-month, representing a 6% increase from the same time last year. On both accounts, inflation came back in line with Dow Jones estimates.
It’s worth noting, most of the deflation would likely be a product of falling energy prices from a year ago when Russia first invaded Ukraine. While lower gas prices are undoubtedly a benefit to Americans, they’re not exactly the Fed’s top concern. The central bank will likely be more preoccupied with core CPI, which excludes volatile categories, like food and energy, and is generally considered a stronger predictor of underlying inflation.
In that regard, economists are a bit more pessimistic. Currently, consensus forecasts project core CPI rose 0.4% in March. While this is slightly less than the 0.5% monthly level recorded in February, it actually represents a 5.6% annual rate, up from February’s 5.5%.
What Does the Next CPI Report Mean for the Fed’s Inflation Battle?
Following last month’s inflation report, traders began pricing in an 85% likelihood that the Fed will move forward with its anticipated 25 basis-point rate hike. Projections proved accurate, as the central bank did raise rates by 25 bps at its March 22 FOMC meeting, pushing the federal funds rate to a range of 4.75% and 5%, a level last seen prior to the 2008 financial crisis.
This time around, the stakes are similar. Indeed, Wednesday’s CPI represents one of the last major economic data releases before the next FOMC meeting, scheduled for early May. While the central bank has a stated preference for the Personal Consumption Expenditures (PCE) report, there’s no denying the importance the CPI plays in the perception of the Fed’s inflation fight.
While there are rumors that the Fed may opt to take a pause on its rate hikes, some pieces of data, like the March jobs report released last week, only strengthen the case for continually hawkish monetary policy.
The U.S. added 236,000 jobs in March, both well below economists’ predictions and the slowest rate of growth since 2020. While this is seemingly exactly what the Fed wants to see, as higher unemployment goes hand-in-hand with deflation, the strong points of the report only strengthened the case for more rate hikes. Indeed, sectors like leisure and hospitality, government, healthcare, and others, each enjoyed strong job growth in March. Combined with a rising labor force participation rate, has pushed many traders towards predicting another rate hike in May.
This includes Jason Pride, Chief Investment Officer of Private Wealth at Glenmede.
“Today’s jobs report is consistent with a slow-moving recession unfolding in the U.S. and one that does not point to immediate resolution of inflation concerns. As such, the odds of another quarter-point rate hike in May should go higher as the data does not appear to justify a Fed pause.”
Currently, traders are pricing in a roughly 80% chance of another rate hike in May, pushing the policy rate to between 5%-5.25%.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
