On Wednesday, investors will digest one of the most important data points the Federal Reserve will consider in its next interest rate decision: April’s Consumer Price Index (CPI).
The inflation report, scheduled for release at 8:30 a.m. ET, is expected to show headline inflation of 3.4%, a slight deceleration from previous Annual price increase of 3.5% in March, according to Bloomberg estimates. Over the past month, consumer prices are expected to have increased 0.4%, matching the month-over-month increase in March.
Rising energy prices, fueled by rising gas prices, should contribute to a “relatively firmer overall CPI,” Bank of America economists Stephen Juneau and Michael Gapen wrote in a note to their customers last week.
“The good news is that gasoline prices fell in May while geopolitical risks from rising oil prices have eased for the moment. Therefore, a further increase in the short term could be more difficult” , the economists said.
On a “core” basis, which excludes the more volatile costs of food and gasoline, prices in April are expected to have increased 3.6% from last year – a slowdown from the annual increase of 3.8% observed in March, according to Bloomberg data.
Core prices are expected to have climbed 0.3% month-over-month in April, compared to the 0.4% increase seen the previous month.
Core inflation has remained stubbornly high due to rising costs of housing and basic services like insurance and medical care.
In March, the BLS noted a sharp increase in basic services like auto insurance, as well as motor vehicle maintenance and repair. The indices jumped 2.6% and 1.6% respectively, after rising just 0.9% and 0.4% in February.
But economists widely expect these trends to reverse.
“We expect motor vehicle insurance and maintenance prices to increase at a slower pace in April after both categories experienced price increases in March,” said Juneau and Gapen of Bank of America.
Morgan Stanley added that in addition to lower inflation in auto insurance, disinflation trends should also improve in rents and health care.
“Cooling labor markets and weak new lease data point to further deceleration in rent inflation,” Diego Anzoategui, Morgan Stanley’s chief economist, wrote in a note to clients last week. “This month and the next few months appear to be important months for rent inflation.”
“We also expect a slight deceleration in health care, driven by falling health insurance prices,” he said.
To cut or not to cut?
Inflation remained above the Federal Reserve’s 2% target on an annual basis. Fed officials classified the decline of up to 2% as follows: “bumpy.”
On Tuesday, producer prices increased hotter than expected in April, indicating that inflation is still high in the second quarter.
It’s worth noting that the Fed’s preferred inflation gauge, the core PCE price index, has remained particularly sticky. The year-over-year change in core PCE remained stable at 2.8% for the month of Marchcorresponding to that of February but up by a tenth of a percent compared to analysts’ expectations.
Investors now anticipate a range of one to two cuts of 25 basis points in 2024, compared to six cuts expected at the start of the year, according to Bloomberg data. On Monday, Federal Reserve Vice Chairman Philip Jefferson became the latest Fed official to call for stable rates until inflation shows further signs of slowing.
Morgan Stanley, however, remains “optimistic that the Fed will cut rates three times this year.” It forecasts that the first rate cut will take place in September, followed by two more cuts in November and December.
“Weaker monthly numbers ahead and faster disinflation starting in the (second half of 2024) give the Fed the confidence it needs that inflation is on a sustained path toward its goal,” predicted the bank.
On Tuesday, markets were pricing in a roughly 49% chance that the Federal Reserve would begin cutting rates at its September meeting, according to CME Group data.
Alexandra Canal is a senior reporter at Yahoo Finance. Follow her on @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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