What to Look For in This Week's CPI Report

If you follow financial media of any kind, you will, over the next few days, be treated many times to what sounds like a statement of the obvious: Every talking head you see or hear will earnestly tell you that Wednesday’s March CPI report is critical and is the only thing that traders are concerned about.

That sounds right. I mean, inflation, or rather the Fed’s policy decisions around it, is the big worry right now, and CPI has been the recognized measure of inflation among market participants for decades. There is an obvious problem with that analysis though, because Federal Reserve Chairman Jerome Powell and other FOMC members have repeatedly said that CPI is not their preferred inflation metric.

That honor goes to core Personal Consumption Expenditure, for which the first Q1 print will come on April 25.

So, two questions jump to mind: why are people obsessed with this week’s CPI release, and how should investors view and analyze the numbers?

In part, the heightened interest in CPI is based on the last two months’ reports. Both have come in higher than expected, and expectations for rate cuts have been slashed as a result. Coming into this year, the market was pricing in somewhere around six or seven cuts in 2024 but after two consecutive months of disappointing CPI reports, that number has been reduced to two or three.

That makes this month’s CPI somewhat more significant than it might otherwise be. The Fed is known to look at rolling three month averages of most data rather than just a single month’s number, so three successive misses will undoubtedly be seen by traders as a bad sign, with more significance than even a regular miss.

However, the FOMC doesn’t look at how the numbers stack up against market expectations. They are concerned with meeting their 2% target for core inflation, so look only at the absolute number. A 3.2% print is still a bad number for them, even if the market is expecting 3.4% as they are this week.

A 3.4% reading, therefore, would be bad even though it would be as expected, and anything over that would be a serious setback for those hoping for rate cuts sooner rather than later.

The other thing that concerns the FOMC is the trend in the numbers and on that basis too, “as expected” would not be good news. 3.4% would represent a second consecutive month of increasing inflation for the first time since August of last year. The time before that, somewhat ominously, was when inflation hit its 9.1% peak in June of 2022.

Often with economic data, the devil is in the details, and the real message from the reports can only be divined after a granular analysis of the breakdowns by sector of the economy or by metrics other than the headline numbers. That, though, is another area in which this week’s CPI is different.

My instincts and training make this a hard thing for me to say, but this week, details don’t matter. This is about how the Fed views the report, and while Powell has said or implied that inflation in goods is more worrying than inflation in services, the committee is much more concerned about the overall trajectory of prices in the economy than they are about any one sector.

On balance, then, Wednesday’s numbers are much more likely to be seen as negative for stocks than positive. Even if CPI is a little lower than expected, it will still be higher than the Fed wants to see, and any relief rally in that event will probably be short-lived.

That doesn’t mean, however, that long-term investors should be selling in front of the numbers. Interest rates and the inflation rate matter, of course, but this week also sees the start of calendar Q1 earnings season, and results there could prove more influential than anything in the CPI data.

Market strength recently despite the big drop in expectations for rate cuts has been based on the fact that US corporations have shown that they can handle both inflation and the interest rate hikes designed to fight it, while still making good money. That is most likely due to AI-driven advances in efficiency and productivity and if that is true, there is a lot more improvement in those areas to come.

Should early earnings suggest that, then any negativity inspired by CPI will be quickly forgotten. That would also be the case should core PCE show improvement later in the month. So, for investors, it will be a “wait and see” week going well beyond Wednesday, and not overreacting to what could easily be a negative market reaction to even a neutral number will be the key for those with a longer-term outlook.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Markets Stocks