April consumer price index report expected to show inflation has already peaked

Shoppers at a grocery store in San Francisco, California, U.S., Monday, May 2, 2022.

David Paul Morris | Bloomberg | Getty Images

April’s consumer price index report is expected to show inflation has already peaked – a development that some investors believe could temporarily calm markets.

But economists say that even with a reprieve in headline inflation, core inflation could rise on a monthly basis and remain elevated for months to come. Core inflation excludes food and energy costs.

The CPI report is expected to show headline inflation rose 0.2% in April, or 8.1% year-on-year, according to Dow Jones. That compares to a whopping 1.2% increase in March, or an 8.5% year-over-year gain. April data is due at 8:30 a.m. ET Wednesday.

Core CPI is expected to rise 0.4% or 6% year-over-year. That compares to 0.3% in March, or 6.5% on an annualized basis.

Stocks swirled on Tuesday ahead of the highly anticipated data. The S&P 500 ended the day with a 0.25% gain and the Nasdaq added 0.98%. The Dow Jones Industrial Average lost 84.96 points.

The closely watched benchmark 10-year Treasury yield fell to around 2.99% on Tuesday after rising sharply to 3.20% on Monday. Bond yields – which move opposite to prices – rose at a rapid pace on expectations of aggressive interest rate hikes from the Federal Reserve.

“I wouldn’t say tomorrow’s CPI matters on its own. I think the combination of March, tomorrow and May data will be kind of the big inflection point,” said Ben Jeffery, securities strategist fixed income at BMO.

But Jeffery said the report has a good chance of being a market mover no matter what.

“I think it’s either going to reaffirm the selling pressure we’ve seen that took 10% to 3.20%…Or I think it’s going to inspire more interest for investors who are waiting for signs that inflation is starting to pick up. culminate,” he said. .

A potential turning point for equities

In the stock market, some investors say the data could signal a turning point if April inflation comes in as expected or is even weaker.

“I think the market, from a technical standpoint, is very focused on trying to guess how much the Fed is going to move,” said Tony Roth, chief investment officer at Wilmington Trust Investment Advisors.

A warmer report would be negative as it could mean the Fed will take an even tougher stance on interest rates. Last week, Fed Chairman Jerome Powell signaled that the central bank could raise rates by 50 basis points, or half a percent, at each of the next two meetings.

The market is worried about inflation and that the Fed’s response could trigger a recession.

“I don’t think this is the end of the market decline… The market needs to go down 20% at a minimum. If we get a series of better inflation data, then I think 20% could be the bottom” , Roth said. The S&P 500 is down nearly 17% from its high.

“If the inflation data is not as good as we think, not just this month but consecutive months, then I think market prices for a recession, then they go down 25% to 40% “Roth said.

Two risks appear

Roth said there are two potential exogenous risks in inflation data, and either could prove to be a problem for markets. One concerns the unknowns surrounding oil and gas supply tensions and price shocks caused by the Russian invasion of Ukraine, and the other concerns the latest Covid-related shutdowns in China and the impact on supply chains.

“Nobody knows how they’re going to play out… Either could be a bigger issue than the market is anticipating right now,” Roth said.

Aneta Markowska, chief financial economist at Jefferies, said she expects a hotter-than-consensus report, with the headline CPI gaining 0.3% and the core jumping 0.5%. . She thinks the market direction is wrong and investors should be more concerned about how far inflation will fall.

“I think a lot of people are focused on the rate slowing year over year, and I think that helps consumers because it looks like real wages will actually be positive for a change in April on a basis monthly,” she said. “But if we get that core acceleration down to the 0.5% that we’re expecting, that’s a problem for the Fed. If you annualize that, you’re running at 6%, and that really wouldn’t mean any slowdown.”

Markowska noted that the central bank assumes inflation will slow to 4% this year and 2.5% next year. “The question we have to ask ourselves is whether we are on track to meet this forecast and if not, the Fed may have a larger policy overrun than it had anticipated. “, she said.

The perception is that inflation issues are supply chain related, but those issues are going away, Markowska added.

“I think that ship has sailed. We’ve moved past supply chains. It’s the service industry. It’s the job market,” she said. “Just because we’re peaking and core goods inflation is coming down doesn’t mean the problem is over. The problem is now everywhere. It’s in services. It’s in the labor market, and it’s not going to go away on its own… We need core inflation to come down to 0.2%, at a pace of 0.3% month-on-month, and we need that ‘She stays there for a while.

Barclays US economist Pooja Sriram said she doesn’t think investors should get too excited about the inflation spike because what will matter is how quickly the level drops.

“For the Fed to be confident that inflation is falling, we need to get a really low core CPI,” she said. “The headline CPI is going to be tough to lower as the energy component swings.”

The energy index rose 11% in March and may have contributed less to headline inflation in April due to lower gasoline prices. Economists say energy will be a bigger issue in May data, as gasoline hits record highs again.

Some economists expect used-car prices to fall in April, but Markowska said the data she monitors shows increases at the retail level.

April consumer price index report expected to show inflation has already peaked

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