Market Insight – CPI Preview

Markets are poised for the upcoming Consumer Price Inflation report, with this report taking on extra importance due to the impacts higher rates are having on the US financial system.

The Federal Reserve will watch the release carefully as it is seen as the final piece of data before the central bank convenes next week to discuss its next move.

In terms of CPI estimates, the annual inflation rate in the US likely reached 6% in February of 2023, slowing for an eighth straight month, and marking the lowest level since September of 2021, compared to 6.4% in January.

Core inflation, which strips out food and energy prices, was seen edging down to 5.5% from 5.6%, also the lowest since late 2021. Compared to January, the CPI likely rose at a softer 0.4%, following a prior 0.5% gain, while the core index grew by 0.4% for a second straight month.

The report is expected to show gasoline prices were up nearly 1% on the month, and further upward pressure came from the cost of used cars, shelter, and airfares.

Inflation in still US elevated and almost three times above the Fed’s target of 2%, boosted by prices of services and housing. At the same time, goods prices could start increasing as supply chains have normalized. In January, the CPI in the US reached 299.170.

Looking at the major investment banks predictions, Goldman Sachs expects to see core CPI rising 0.45% MoM while headline CPI is seen at 0.4% MoM and 6.08%.

Goldman Sachs notes “Going forward, we expect monthly core CPI inflation to remain in the 0.3-0.4% range in the next few months. We forecast yoy core CPI inflation of 3.7% in Dec 2023 and 2.6% in Dec 2024. The deceleration we expect in 2023 is driven more by goods than services categories.”

Also, BofA economists forecast core CPI at 0.42% MoM but warn that risks are tilted to the upside and they note that “We do not think a 0.5% print is out of the question… given the recent gains in the Manheim used vehicle index.“