Wednesday’s report is expected to show little progress against inflation

A hotly anticipated Labor Department report due out Wednesday is expected to show that not much progress is being made in the battle to reduce inflation.

If so, it would be bad news for consumers, market participants and Federal Reserve officials, who hope that price increases will be slow enough that they can begin gradually cutting interest rates by the end of the year.

The consumer price index, which measures the costs of a broad basket of goods and services in the $27.4 trillion U.S. economy, is expected to see increases of 0.3% for both the global index and the main parameter that excludes volatile foods. and energy.

On a 12-month basis, this would put inflation rates at 3.4% and 3.7% respectively, a 0.2 percentage point increase in the headline rate from February, a decrease of just 0.1 percentage point for the core rate, and both are still far away. from the central bank’s 2% target.

“We’re not getting there fast enough or convincingly enough, and I think that’s what this report will show,” said Dan North, senior economist at Allianz Trade North America.

The report will be released at 8:30 a.m. ET.

North said he expects Fed officials to view the report in much the same way, confirming comments they have made for weeks that they need more evidence that inflation is convincingly on track to return to 2 % before rate cuts can occur.

“Moving convincingly toward 2% doesn’t just mean hitting 2% for one month. It means hitting 2% or below for months on end,” North said. “We’re a long way from that, and that’s probably what we’ll see tomorrow, too.”

To be sure, inflation has fallen sharply since its peak above 9% in June 2022. The Fed enacted 11 interest rate increases from March 2022 to July 2023 totaling 5.25 percentage points for its benchmark overnight borrowing rate known as the federal funds rate.

But progress has been slow in recent months. Indeed, the primary consumer price index has barely moved since the central bank halted the increase, although the core index, which policymakers see as a better barometer of long-term trends, has fallen by about a point. percentage.

While the Fed watches the CPI and other indicators, it focuses primarily on the Commerce Department’s personal consumption expenditures index, sometimes referred to as the PCE deflator. This showed that headline inflation was at 2.5% and the base rate at 2.8% in February.

For their part, markets have become nervous about the state of inflation and how it will affect rate policy. After making big gains earlier in the year, stocks have slowed over the last week or so, seeing wild swings as investors tried to make sense of the mixed signals.

Earlier this year, traders in the federal funds futures market were pricing in the likelihood that the central bank would begin cutting rates in March and continue up to seven cuts before the end of 2024. The latest prices indicate that the cuts will not be implemented. begin at least through June and not exceed three in total, assuming quarter-percentage-point increases, according to CME Group FedWatch calculations.

“I don’t see much here that will magically move things the way they want to go,” North said.

There will be a few key areas to watch in Wednesday’s report.

Beyond the headline numbers, trends in items such as lodging, airfares and vehicle prices will be important. These areas have been direction indicators during the current business cycle, and movements in either direction could suggest long-term trends.

Economists at Goldman Sachs expect sharp declines in air travel-related items and vehicle sticker prices, and see smaller increases in housing costs, which account for about a third of the CPI’s weighting. A New York Fed survey released Monday, however, showed a sharp rise in expectations for rental costs in the coming year, which is bad news for policymakers who have often cited slowing housing costs as the cornerstone of the their thesis of easing inflation.

Likewise, the National Federation of Independent Business survey for March, released Tuesday, showed confidence among small businesses is at its lowest level in more than 11 years, with owners citing inflation as their top concern .

“Inflation is cumulative, and that’s why prices still look high,” North said. “People still can’t believe how high the prices are.”

Gas prices could also play an important role in the CPI release after rising 3.8% in February. While the gasoline index has remained relatively unchanged over the past two years, it is still up more than 70% since April 2020, when the brief Covid-driven recession ended. In the same period, food increased by approximately 23%.