Inflation expected to remain elevated as rate cut debate takes center stage

Inflation expected to remain elevated as rate cut debate takes center stage

On Wednesday, investors will digest one of the most important data points the Federal Reserve will consider in its next interest rate decision: March'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%, an acceleration from February's 3.2% annual gain in prices, according to estimates from Bloomberg. Higher energy costs, fueled by a jump in gas prices, are expected to have driven the increase.

Over the prior month, consumer prices are expected to have risen 0.3%, down from February's 0.4% monthly increase.

On a "core" basis, which strips out the more volatile costs of food and gas, prices in March are expected to have risen 3.7% over last year — a modest slowdown from the 3.8% annual increase seen in February, according to Bloomberg data.

"After two firm reports to start the year, core CPI inflation should cool off in March," Bank of America economists Stephen Juneau and Michael Gapen wrote in a note to clients on Friday.

Core prices are expected to have climbed 0.3% on a monthly basis in March, 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.

But Bank of America expects a slight decline in the prices of core goods, largely driven by a drop in new and used car prices. The bank also expects less price pressure from core services like airfare and lodging away from home.

"If our forecast proves correct, it should provide some confidence to the Fed," the economists said.

Other economists also see further improvements in core inflation throughout the year.

Going forward, we expect monthly core CPI inflation to slow to 0.20-0.25%," Goldman Sachs lead economist Jan Hatzius wrote on Monday.

"We see further disinflation in the pipeline in 2024 from rebalancing in the auto, housing rental, and labor markets," the economist added.

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."

Notably, the Fed's preferred inflation gauge, the so-called core PCE price index, has shown a slight cooling in recent months.

The year-over-year change in core PCE slowed to 2.8% for the month of February, down from 2.9% in January. Federal Reserve Chair Jerome Powell said the data is "along the lines of what we want to see."

But not all of the data has been supportive of a rate cut. Just last week, a strong labor report showed the US economy added more jobs than expected in March as the unemployment rate decreased while wage growth held steady.

Investors now anticipate just two and a half 25-basis-point cuts this year, down from the six cuts expected at the start of the year, according to Bloomberg data. Former St. Louis Fed president James Bullard said Tuesday a three-rate-cut scenario remains the "the base case."

"[The Fed] wants to cut rates, but the economy is standing in its way," Mizuho Securities USA chief economist Steven Ricchiuto told Yahoo Finance Live on Tuesday. "The Fed is fighting the economy. In particular, they’re fighting the American consumers, and that’s a fight that I would not want to get involved in."

As of Tuesday afternoon, markets were pricing in a 56% chance the Federal Reserve begins to cut rates at its June meeting, according to data from the CME Group. That's down from a 62% chance a week ago.