With a FOMC meeting next week, and new economic projections and a dot plot to be published, US CPI data probably assumes even greater importance on Tuesday, especially after the record rallies in stock markets and gold prices. Inflation gave markets a nasty shock in January with an upside surprise, so was that an anomaly or something more persistent?
The monthly headline figure is forecast at 0.4% m/m, which would be above what Fed officials ideally need to see in order to kick off the rate cut cycle. The 12-month CPI rate is expected to have stayed unchanged at 3.2%. But there may be some relief from the core measure that excludes food and energy prices. It’s projected to have eased two-tenths to 3.7% with the m/m number a tick lower at 0.3%. Shelter costs are the key component and a heavy weighting in the consumer basket, and falling prices in market-based gauges of rent are expected to impact CPI at some point. Meanwhile, the Fed’s favoured inflation measure, the core PCE data, recently printed high but better than many feared, while the prior month was revised down.
Market Reaction after record highs
Risk markets have rallied in the first weeks of the year, astounding many waiting for a slump. Solid earnings and economic data have cemented the consensus bet on a soft landing and policy easing starting in a few months. The S&P 500 has closed at all-time highs 16 times this year, accounting for roughly a third of all trading days. But bubble anxiety is rising, with the bull runs based on the Fed reducing rates by June, while the recent US jobs report also further bolstered those bets.
Interestingly, the chances of a June cut now sit just around 70%. That is generally recognised as the threshold where the FOMC would be expected to deliver what’s priced in. The beleaguered dollar, which hit near two-month lows last week, could do with a sticky set of data, while gold and equities would definitely prefer more proof of disinflation. The data will set markets up for next week’s Fed policy decision and the updated economic forecasts.
Here are the numbers expected for the US inflation release:
