Here’s everything to expect from Wednesday’s key inflation report

Inflation trends may have become a little less bleak in April, although they still risk keeping the Federal Reserve uncomfortable enough to remain on pause on interest rates.

The consumer price index, a broad measure of the cost of goods and services in the market, is expected to post another rise for the month, although the annual inflation rate is expected to decline slightly, according to the Dow Jones consensus forecast. .

Prices for all items are expected to rise 0.4% for the month, as in March, although the annual rate is expected to fall slightly to 3.4%, from 3.5% the previous month. On the important core measure that excludes food and energy, the respective projections are 0.3%, lower than March’s 0.4% gain, and 3.6%, down from 3.8%. .

In remarks Tuesday in Amsterdam, Fed Chairman Jerome Powell expressed hope that inflation would slow throughout the year, but acknowledged slow progress and made clear that rates should not not moving anytime soon.

“I expect inflation to come back down on a monthly basis to levels that more closely resemble the lower numbers we had last year,” he told attendees at a banking conference. “I would say my confidence in this is not as high as it was, having seen these numbers in the first three months of the year. So we’re just going to have to see where the data stands on the ‘inflation.”

In line with the stronger-than-expected first quarter figures, the producer price index rose 0.5% in April, almost double expectations, which is expected to start the second quarter on a sour note. The index, a gauge of wholesale prices, accelerated 2.2% on an annual basis, the highest reading in a year.

This also increased the importance of Wednesday’s CPI release. The Department of Labor’s Bureau of Labor Statistics will provide the data at 8:30 a.m. ET.

“This will be the most important development of the month (excluding nonfarm wages) as inflation continues to defy expectations,” said Dan North, senior economist at Allianz Trade North America. Even if the report comes close to consensus expectations, it would be “insufficient progress for the Fed to consider a reduction before September,” he added.

Indeed, financial markets have given up hope of a dovish Fed, reducing expectations for at least six rate cuts since the start of the year to two, with the first unlikely before the September meeting.

Stocks, however, have resisted Fed tightening as the focus instead shifts to strong corporate profits and economic growth.

Wall Street will be scrutinizing the CPI report for signs of how much longer high inflation conditions will persist. Opinion surveys in recent days have shown that consumer expectations for inflation have risen, which the Fed sees as key to controlling price pressures.

Wednesday’s focus will be on housing, as housing-related costs account for about a third of the CPI’s weighting. Fed officials are counting on easing pressures on the rental market, a sign that the sharp disinflation present in 2023 would return this year, but it has been thwarted so far.

“The slower the decline, the longer the path to the Fed’s inflation target,” said Erica Groshen, a senior economist at Cornell’s School of Industrial and Labor Relations and a former senior BLS and Fed official. from New York. “We’re not seeing any major changes in the real estate market that would make me think it’s going to act differently. Demographics are slowly changing, so I don’t really see an explanation for the real estate industry reacting very differently in the pass.”

The key component of housing costs is called owner’s equivalent rent, a hypothetical measure of what homeowners think they can get by renting out their homes. It rose 5.9% annually in March, down from a peak above 8% in April 2023, but still well above a level consistent with headline inflation of 2%.

While Fed officials were willing to look at housing costs when considering policy, continued price stickiness could change that. Central bankers had even proposed a separate measure known as “super core” that looked at costs of services excluding food, energy and housing services, but it may no longer be as relevant today.

“It’s very important that the Fed is not behind the times on this,” Groshen said. “So I think it will make the Fed more cautious about lowering rates. I don’t think it would be enough for them to raise rates, but it would probably fuel some caution on their part.”