The upcoming Labor Department report on inflation is expected to show that progress in reducing inflation has been slow. The consumer price index is expected to register increases of 0.3% for both the all-items measure and the core measure, which excludes food and energy. This would put the inflation rates at 3.4% and 3.7%, respectively, still far from the Federal Reserve’s 2% target. Economists believe that more evidence is needed for inflation to convincingly return to 2% before interest rate cuts can happen.
Despite a peak above 9% in June 2022, inflation has come down significantly since then. The Fed’s interest rate hikes from March 2022 to July 2023 have led to progress, but inflation has been slow to decrease in recent months. The central bank focuses on the Commerce Department’s personal consumption expenditures index, with headline inflation at 2.5% and the core rate at 2.8% in February. Market participants are uncertain about the impact of inflation on rate policy, with stocks experiencing volatility in response to conflicting signals.
Traders in the fed funds futures market were initially pricing in rate cuts starting in March, but the latest projections indicate that cuts may not happen until June and may total three quarter-percentage point cuts. Economists are closely watching trends in items such as shelter, airfares, and vehicle prices in the upcoming report. declines in air travel-related items and vehicle prices are expected, while increases in shelter costs may suggest longer-term trends. A sharp uptick in expectations for rental costs and declining small business confidence due to inflation are concerning for policymakers.
The role of gas prices in the CPI release is crucial after a 3.8% increase in February. Despite relatively unchanged gas prices over the past two years, they are still up over 70% since April 2020. Food prices have also increased by about 23% during the same period. The slow progress in reducing inflation is a major concern for consumers, market participants, and Federal Reserve officials, who hope that prices will slow enough to allow for interest rate cuts later in the year. The upcoming report is expected to show that convincing progress towards the 2% inflation target has not been made and that more evidence is needed before rate cuts can occur.
