The latest U.S. Consumer Price Index (CPI) data, due for release on Wednesday, will be closely scrutinized by investors as the Federal Reserve weighs its next policy move.
Economists polled by Reuters project a 0.2% month-over-month increase in headline CPI for March, down from 0.4% in February. Core CPI, which excludes volatile food and energy prices, is forecast to rise 0.3%, matching the prior month’s pace. On an annual basis, headline inflation is expected to ease to 3.4% from 3.2%, while core inflation is seen steady at 3.8%.
The report arrives just weeks before the Fed’s May 1 policy meeting, where policymakers must balance persistent price pressures against signs of economic resilience. Recent remarks from Fed officials have underscored a data-dependent approach, with Chair Jerome Powell signaling caution amid mixed signals from the labor market and services inflation.
Markets are pricing in a roughly 25% probability of a 25-basis-point rate hike at the May meeting, according to CME Group’s FedWatch tool. A softer-than-expected CPI print could reinforce expectations for a pause, while a stronger-than-anticipated reading may revive bets on further tightening.
Treasury yields and the U.S. dollar have shown sensitivity to CPI surprises in recent months, reflecting the report’s outsize impact on monetary policy expectations. The 10-year Treasury yield hovered near 4.10% ahead of the release, while the dollar index traded modestly lower against major peers.
Analysts at Goldman Sachs noted that a moderation in shelter and services inflation would be critical to sustaining the disinflationary trend. However, they cautioned that wage growth and core services ex-shelter remain sticky, limiting the Fed’s scope for aggressive easing.
The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, has shown slower progress in recent months, with core PCE cooling to 2.8% in February from a peak of 5.6% in early 2022. Still, policymakers have emphasized the need for sustained progress before declaring victory on inflation.
Investors will also parse the CPI components for clues on the trajectory of food, energy, and used vehicle prices, which have contributed to volatility in recent readings.
The outcome of Wednesday’s report could sway the Fed’s dot plot projections, which are set to be updated in June and may hint at the path of rates for the remainder of 2024.
