What To Expect From Wednesday’s Inflation Report

The Bureau of Labor Statistics is set to deliver another round of mixed signals about the course of inflation on Wednesday when it publishes the official report for the Consumer Price Index for March.

The consensus forecast among economists is for the CPI, a measure of the cost of living, to have risen 3.5% since last March, an acceleration from the 3.2% annual inflation rate in February, according to Wells Fargo Securities. However, it’s also expected to show a cooling of “core” inflation, an important measure that excludes prices for food and energy, and which is closely watched by central bankers at the Federal Reserve who set the nation’s monetary policy.

Core Inflation Likely Shows Less Price Growth

Economists view core inflation as a more reliable indicator of the trajectory of inflation because prices for food and gas often go up and down for reasons that have nothing to do with broader inflation trends. The consensus forecast calls for core prices to have risen 0.3% in March, versus a 0.4% gain in February, and the 12-month change decreasing to 3.7% from 3.8%.

The difference in the trajectory of core and overall inflation is mainly due to gas prices, which rose faster than they usually do this time of year, economists said.

“Energy prices have taken a turn higher in recent months, which has likely caught the attention of consumers,” Stephen Juneau and Michael Gapen, economists at Bank of America Securities, wrote in a commentary ahead of the release.

Meanwhile, prices for used cars, an important component of both core and overall inflation, have fallen, putting notable downward pressure on the core measure.

What Will the Fed Think?

Inflation measures are attracting extra attention from financial markets these days because they’re crucial to all kinds of interest rates throughout the economy. Officials at the Fed are preparing to cut the fed funds rate, but have said they will do so only when they’re confident inflation is under control. Therefore the quicker inflation falls, the greater the chances of reduced interest rates on mortgages and credit cards, all of which now have interest rates close to their highest in decades. 

A report in line with expectations could leave the Fed on track to begin cutting interest rates in June, Juneau and Gapen wrote. 

On the other hand, surprisingly high inflation could delay rate cuts, or even prompt the Fed to raise its interest rate even higher than its current 23-year high—a possibility that had been considered off the table until Federal Reserve governor Michelle Bowman brought it up Friday in a speech.