Gasoline prices are displayed at a gas station on March 12, 2024 in Chicago, Illinois.
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A closely watched Labor Department report due on Wednesday is expected to show little progress has been made in the battle to bring down inflation.
If so, it would be bad news for consumers, market participants and Federal Reserve officials, who are hoping that rate increases will be slow enough to begin gradually cutting interest rates later this year.
The consumer price index, which measures the cost of a wide range of goods and services in the $27.4 trillion U.S. economy, is expected to rise 0.3 percent for both the all-items measure and the core measure that excludes unstable food and energy.
On a twelve-month basis that would put inflation rates at 3.4% and 3.7%, respectively, a 0.2 percentage point increase in the headline rate from February, just a 0.1 percentage point drop for the core rate, both they are still well short of the central bank’s 2% target.
“We’re not heading there fast enough or convincingly enough, and I think that’s what this report will show,” said Dan North, senior economist at Allianz Trade North America.
The report will be published at 8:30 am. ET.
Progress, but not enough
North said he expects Fed officials to view the report much the same way, backing up comments they’ve made for weeks that more evidence is needed that Inflation is convincingly back to 2% before interest rate cuts take place.
“Moving convincingly toward 2% doesn’t just mean you’re going to hit 2% for one month. It means you’re going to hit 2% or less for months and months on end,” North said. “We are very far from that and that will probably be seen tomorrow as well.”
To be sure, inflation has come down dramatically from its peak of over 9% in June 2022. The Fed has approved 11 rate hikes from March 2022 to July 2023, totaling 5.25 percentage points for the key lending rate overnight rate, known as the federal funds rate.
But progress has been slow in recent months. In fact, the core CPI has barely budged since the central bank stopped hiking, although the core, which policymakers see as a better barometer of longer-term trends, has fallen by about a percentage point.
While the Fed tracks the CPI and other indicators, it focuses more on the Commerce Department’s personal consumption expenditures index, sometimes referred to as the PCE deflator. This showed that headline inflation stood at 2.5% and the key interest rate at 2.8% in February.
For their part, markets have become nervous about the state of inflation and how it will affect interest rate policy. After posting big gains to start the year, stocks have fallen over the past week or so, swinging wildly as investors tried to make sense of the conflicting signals.
Earlier this year, traders in the Fed Funds futures market were pricing in the possibility that the central bank would begin cutting interest rates in March and continue for up to seven cuts before the end of 2024. The latest pricing shows that the cuts will not they will start at least through June and no more than three in total, assuming increases of a quarter of a percentage point, according to CME Group FedWatch calculations.
“I don’t see much here that will magically move things the way they want to go,” North said.
What to watch
There will be some key points to watch in Wednesday’s report.
Beyond the headlines, trends in items such as umbrellas, airline tickets and vehicle prices will be important. These areas have been campaigned during the current economic cycle, and moves either way could indicate long-term trends.
Goldman Sachs economists expect immediate declines in items related to air travel as well as vehicle sticker prices, and will see smaller increases in the cost of accommodations, which make up about a third of the CPI’s weighting. A New York Fed survey released on Monday, however, showed a sharp rise in expectations for rental costs next year, which is bad news for policymakers who often cite slowing housing costs as the cornerstone in position of easing inflation.
Similarly, the National Federation of Independent Business’ March survey, released Tuesday, showed confidence among small businesses. the lowest level in more than 11 years, with landlords citing inflation as their main concern.
“Inflation is cumulative and that’s why prices still look high,” North said. “People still can’t believe how high the prices are.”
Gas prices could also play a major role in CPI release after rising 3.8% in February. Although the petrol index has been relatively flat over the past two years, it is still over 70% since April 2020, when the brief Covid recession ended. Food grew by about 23% over the same period.