Inflation trends may have gotten a little less dreary in April, though they are still likely to keep the Federal Reserve uncomfortable enough to stay on pause with interest rates.
The consumer price index, a broad measure of the cost of goods and services in the marketplace, is expected to show another increase for the month, though the annual inflation rate is projected to come down slightly, according to Dow Jones consensus forecasts.
Prices for all items are projected to show a 0.4% gain on the month, the same as in March, though the annual rate is expected to edge lower to 3.4%, compared to the 3.5% reading in the previous month. On the important core measure that excludes food and energy, the respective projections are 0.3%, lower than March's 0.4% gain, and 3.6%, which is down from 3.8%.
In remarks made Tuesday in Amsterdam, Fed Chair Jerome Powell expressed hope that inflation would decelerate through the year but acknowledged the slow progress and provided further direction that rates aren't likely to move anytime soon.
"I expect that inflation will move back down on a monthly basis to levels that were more like the lower readings we were having last year," he told attendees at a banking conference. "I would say my confidence in that is not as high as it was, having seen these readings in the first three months of the year. So we're just going to have to see where the inflation data fall out."
Wholesale gauge brings bad news
Keeping with the higher-than-expected readings in the first quarter, the producer price index rose 0.5% in April, nearly double the expectation to kick off the second quarter on a sour note. The index, a proxy for wholesale prices, accelerated 2.2% on an annual basis, the highest reading in a year.
It also heightened the importance of Wednesday's CPI release. The Labor Department's Bureau of Labor Statistics will provide the data at 8:30 a.m. ET.
"This will be the most important read of the month [excluding nonfarm payrolls] as inflation continues to defy expectations," said Dan North, senior economist at Allianz Trade North America. Even if the report comes in around consensus expectations, it will be "inadequate progress for the Fed to consider a cut until September," he added.
Indeed, financial markets have given up hope on an accommodative Fed, reducing expectations from the start of the year of at least six rate cuts now down to two, with the first one unlikely to come before the September meeting.
Stocks, though, have been resilient in the face of a tighter Fed, with the focus instead turning to solid corporate earnings and economic growth.
Focus on housing
Wall Street will pore through the CPI report looking for signs of how much longer the elevated inflation conditions will continue. Sentiment surveys in recent days have shown that consumer expectations for inflation have risen, which the Fed considers key in taming price pressures.
One crucial focus Wednesday will be on housing, as shelter-related costs comprise about one-third of the weighting in the CPI. Fed officials have been banking on easing pressures in the rental market as a sign that the strong disinflation present during 2023 would appear again this year, but have so far been thwarted.
"The slower it comes down, the longer the path towards the Fed's inflation target," said Erica Groshen, senior economist at Cornell's School of Industrial and Labor Relations and a former senior official with both the BLS and New York Fed. "We're not seeing any big shifts in the housing market that would make me think it's just now going to act differently. Demographics are slow to change. So I don't really see an explanation for housing to react very differently than it has in the past."
The key component of shelter costs is called owners' equivalent rent, a hypothetical measure of what owners think they can get to rent their homes. It rose 5.9% annually in March, down from a peak of above 8% in April 2023 but still well above a level consistent with 2% overall inflation.
While Fed officials had been willing to look through housing costs when considering policy, continued stickiness in prices could change that. Central bankers had even come up with a separate measure known as "super core" that looked at services costs excluding food, energy and housing services, but that may not be as relevant now.
"It's very important for the Fed not to be behind the curve on this," Groshen said. "So I think it will make the Fed more cautious about lowering rates. I don't think this would be enough for them to raise rates, but it probably will feed caution on their part."