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On Wednesday, investors will digest one of the most important data points the Federal Reserve will consider in its next interest rate decision: April’s Consumer Price Index (CPI).
The inflation report, set for release at 8:30 a.m. ET, is expected to show headline inflation of 3.4%, a slight deceleration from March’s 3.5% annual gain in prices, according to estimates from Bloomberg. Over the prior month, consumer prices are expected to have risen 0.4%, matching March’s month-over-month increase.
Higher energy prices, fueled by an increase in gas prices, are expected to contribute to a "relatively firmer headline CPI print," Bank of America economists Stephen Juneau and Michael Gapen wrote in a note to clients last week.
"The good news is that gasoline prices have fallen in May as geopolitical risks to higher oil prices have eased for the time being. Therefore, further increase in the near-term could be more challenged," the economists said.
On a "core" basis, which strips out the more volatile costs of food and gas, prices in April are expected to have risen 3.6% over last year — a slowdown from the 3.8% annual increase seen in March, according to Bloomberg data.
Core prices are expected to have climbed 0.3% month over month in April, compared to the 0.4% increase seen in the prior month.
Core inflation has remained stubbornly elevated due to higher costs of shelter and core services like insurance and medical care.
In March, the BLS noted sharp upticks in core services like motor vehicle insurance, along with motor vehicle maintenance and repair. The indexes jumped 2.6% and 1.6%, respectively, after rising just 0.9% and 0.4% in February.
But economists largely expect those trends to reverse.
"We expect motor vehicle insurance and maintenance prices to increase at a slower pace in April after both categories saw a surge in prices in March," said Bank of America’s Juneau and Gapen.
Morgan Stanley added that, in addition to weaker car insurance inflation, disinflation trends should also improve in rents and healthcare.
"Cooling labor markets and weak data on new leases indicate further deceleration in rent inflation," Morgan Stanley lead economist Diego Anzoategui wrote in a note to clients last week. "This and the next few months seem to be important months for rent inflation."
"We also expect a slight deceleration in healthcare, driven by lower health insurance prices," he said.
To cut or not to cut?
Inflation has remained above the Federal Reserve’s 2% target on an annual basis. Fed officials have categorized the path down to 2% as "bumpy."
On Tuesday, producer prices came in hotter than anticipated in April, indicating inflation is still persistently high in the second quarter.
Notably, the Fed’s preferred inflation gauge, the so-called core PCE price index, has remained particularly sticky. The year-over-year change in core PCE held steady at 2.8% for the month of March, matching February but coming in a tenth of a percent higher than analysts had expected.
Investors now anticipate a range of one to two 25-basis-point cuts in 2024, down from the six cuts expected at the start of the year, according to Bloomberg data. On Monday, Federal Reserve Vice Chair Philip Jefferson became the latest Fed official to call for steady rates until inflation showed further signs of easing.
Morgan Stanley, however, remains "bullish the Fed will cut three times this year." It anticipates the first rate cut to come in September, followed by two more cuts in November and December.
"Weaker monthly prints ahead with faster disinflation starting in [the second half of 2024] provides the Fed the confidence it needs that inflation is on a sustained path toward target," the bank predicted.
As of Tuesday, markets were pricing in a roughly 49% chance the Federal Reserve begins to cut rates at its September meeting, according to data from the CME Group.
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