The Labor Department will release April’s Consumer Price Index Wednesday–a measure of prices for goods and services–amid sticky inflation, a robust job market, and the recent banking turmoil. Bloomberg is forecasting April’s inflation will remain at 5% but see a modest decline in core CPI, which excludes food and energy prices, from 5.6% in March to 5.5%.
Here are five things to watch out for in tomorrow’s CPI report:
1. Headline numbers
After three months of deacceleration, economists are estimating April’s inflation will remain at 5.0% over the 12 months period. However, regarding the core CPI, economists are expecting the figure to slightly soften from 5.6% in March to 5.5%, which is aligned with Bloomberg’s forecast.
Economists are expecting core services–such as housing rents and shelter–to soften in tomorrow’s numbers. However, this will be offset by an increase in prices in the goods categories, particularly used cars.
2. The Fed: should I stay or should I hike?
Despite the forecast seeing an easing in core inflation, which economists see as a better predictor of future inflation, some economic analysts are moving away from the mindset of the Fed pausing to possibly hiking interest rates.
The recent Senior Loan Officer Survey showed that consumer borrowing continues to be strong and that lending is increasing on a weekly basis. As long as consumer spending holds up and a recession isn’t on the timetable for this year, the unemployment rate will probably continue to be low, which will make it difficult for the Fed to cool inflation. So, expect the Fed to possibly increase the interest rate once or twice by the end of the year to discourage businesses and consumers from borrowing.
3. Other signs that could signal the Fed to do more
Core goods inflation remains firm, which is a troubling trend for the Federal Reserve, especially as it tries to cool down the economy further. Also, core services like shelter remain elevated and the Fed will need to see a sustained downward trend in that category, accompanied by slowing wages, in order for the Central Bank to consider pausing on interest rates.
4. Inflation expectations
Two things that consumers notice the most are food and energy prices. When these prices calm down, fighting inflation becomes a bit easier for Fed officials. Energy inflation has been generally on a downward trend in the last six months, with an occasional interruption like the previous month. However, food inflation has been more resilient. March’s CPI report did see a significant easing in food prices and economists are expecting to see them continue to soften.
With summer approaching, consumers are also keeping an eye on the travel sector. Airline prices have increased despite jet fuel prices coming down. Hotel prices are also elevated due to wage growth, and the increase in payroll is usually passed on to consumers. Until the Fed can tame prices for goods and services, expect an increase in inflation expectations.
5. A recession but when?
Some economists predict that a recession could happen in the second half of this year if the economy continues to cool and if the unemployment rate increases significantly. The tightening of the credit conditions could help the Fed prevent companies from borrowing money and, at the very least, not adding additional jobs to the labor market.
But economic data still shows a resilient job market, job growth and wage gains remain strong, and consumer borrowing and spending haven’t cooled enough for the Fed to pause. If the Central Bank is determined to bring down the unemployment rate by a whole percentage, it will need to raise interest rates several times this year, which would likely bring the economy into a recession in the first half of 2024.
