A gas station displays the price of gasoline on March 12, 2024 in Chicago, Illinois.
Scott Olson | Getty Images
A closely watched Labor Department report released on Wednesday is expected to show little progress in the fight to lower inflation.
If so, it would be bad news for consumers, market participants and Fed officials, who are hoping prices rise slowly enough to begin gradually cutting interest rates later this year.
The Consumer Price Index, which measures the cost of a variety of goods and services in the $27.4 trillion U.S. economy, is expected to rise 0.3% across all items, as well as the core measure excluding volatile food and energy.
Calculated on a 12-month basis, the inflation rates will be 3.4% and 3.7% respectively. The overall interest rate increased by 0.2 percentage points from February, and the core interest rate only decreased by 0.1 percentage points. The two are still far apart. The central bank’s 2% target.
“We’re not moving fast enough or convincingly enough, and I think that’s what this report will show,” said Dan North, senior economist at Allianz Trading North America.
The report will be released at 8:30 a.m. ET.
Progress made, but not enough
North said he expected Fed officials to view the report the same way, backing comments they have made for weeks that they needed more evidence to prove it. It is convincing that inflation will rise back to 2% before cutting interest rates.
“Convincingly moving toward 2% doesn’t just mean hitting 2% for a month. It also means hitting 2% or lower for several months in a row,” North said. “We’re still a long way from that and that’s probably going to be the case tomorrow.”
To be sure, inflation has fallen sharply from its peak of over 9% in June 2022. The Federal Reserve raised interest rates 11 times from March 2022 to July 2023, raising its benchmark overnight borrowing rate (the federal funds rate) by a total of 5.25 percentage points.
But progress has been slow over the past few months. In fact, headline CPI has barely budged since the Fed stopped raising interest rates, even as core CPI, the barometer the Fed considers more reflective of long-term trends, has fallen by about a percentage point.
While the Fed focuses on the consumer price index and other indicators, it focuses most on the Commerce Department’s personal consumption expenditures index, sometimes called the personal consumption expenditures deflator. This showed that headline inflation was 2.5% in February and core inflation was 2.8%.
As far as markets are concerned, there is growing tension over the state of inflation and how it will affect Fed policy. After making big gains at the start of the year, stocks have retreated in the past week or so, with the market experiencing wild swings as investors try to shake off conflicting signals.
Earlier this year, traders in the federal funds futures market priced in the possibility that the Fed would begin cutting interest rates in March and continue with as many as seven more cuts by the end of 2024.The latest pricing suggests that rate cuts will not begin until at least June, assuming increments of a quarter of a percentage point, and no more than three in total, according to CME Group Fed Watch calculate.
“I don’t see a lot of things here that magically make things go the way they want them to,” North said.
What to see
There will be several key areas to watch in Wednesday’s report.
In addition to overall data, trends in items such as housing, air tickets and car prices are also important. These areas have been leading the current economic cycle, and moves in either direction could signal longer-term trends.
Economists at Goldman Sachs expect across-the-board declines in air travel-related items, as well as vehicle sticker prices, and expect a smaller increase in housing costs, which account for about a third of the weight in the Consumer Price Index (CPI). However, a survey released by the New York Federal Reserve Bank on Monday showed a sharp rise in expectations for rental costs next year, which is bad news for policymakers who often point to falling housing costs as a cornerstone of their easing inflation arguments. .
Likewise, a National Federation of Independent Business March survey released Tuesday showed small businesses are confident about their growth. At its lowest level in 11 years, homeowners cited inflation as their top concern.
“Inflation is cumulative, which is why prices remain high,” North said. “People still can’t believe how high the prices are.”
Natural gas prices are also likely to play an important role in the CPI release, following a 3.8% rise in February. While the gasoline index has been relatively unchanged over the past two years, it is still up more than 70% from April 2020, when the brief COVID-19 recession ended. Food prices increased by about 23% during the same period.
