US CPI Preview – Inflation to fall

Traders and investors are awaiting the release of US CPI inflation data from this week, and although the US dollar is moving and stocks are fluctuating, the bulk of this week’s move should come after the CPI release.

The Federal Reserve will meet on May 3, confirming that these figures will definitely still have a significant impact given that the April CPI numbers won’t be released before that next meeting.

At the time of writing, Fed funds futures point to a 71% chance of another 25-basis point rate hike at next month’s FOMC meeting, reverting to expectations held prior to the recent banking turmoil and SVB’s collapse.

US inflation has not been decreasing as quickly as expected, and the Consumer Price Index data for March, to be released on this Wednesday estimated inflation of over 5% annually and a fairly modest 0.3% month-on-month increase (3.66% annualized rate) in prices according to some data-driven projections.

However, the core inflation rate may be more concerning, with an estimated 0.45% month-on-month increase (5.54% annualized rate) once food and energy are excluded, as energy costs are expected to have fallen, which could help lower headline inflation numbers.

The annual inflation rate in the US slowed to 6% in February of 2023, the lowest since September of 2021, in line with market forecasts, and compared to 6.4% in January.

Compared to the previous month, the CPI rose 0.4%, following a prior 0.5% gain and also matching forecasts. The core rate, however, edged higher to 0.5% from 0.4%, compared to forecasts of 0.4%. Inflation in the US remains three times above the Fed’s target of 2%. 

This month’s CPI print will be used to validate the recent rhetoric by Fed officials who are still focused on restoring price stability. I still see inflation dropping year-on-year this month.

Things have been made more complicated by a still-tight labour market as well as the unexpected OPEC crude oil supply cuts.