2023-05-09 15:15:00 ET
April's consumer price index, to be released on Wednesday, will give economists and policymakers fresh data on whether the Federal Reserve is succeeding in bringing down the rate of inflation toward its 2% goal.
March's CPI showed inflation receding for nine straight months, "after the Federal Reserve awoke to the reality of high prices and began hiking rates in March of last year," said Bankrate Senior Economist Mark Hamrick.
With core CPI rising 5.6% Y/Y in March, inflation has ebbed from its peak of 9.1% last summer, but remains well above the Fed's 2% goal. And the April number is expected to show little if any progress. Economists expect the headline CPI number to rise 0.4% in April, up from the 0.1% increase in March; on a Y/Y basis, that comes to a 5.0% rate, unchanged from the March rate.
Core CPI, which excludes the volatile food and energy sectors, is also expected to increase 0.4%, unchanged from the March M/M increase; it's expects to rise 5.5% Y/Y vs. the March print of 5.6%.
Long road ahead: Kevin Rendino, CEO of 180 Degree Capital ( TURN ), which invests in small-cap companies, doesn't see inflation hitting the Fed's goal for a long time yet. "You're gonna have to have a meaningfully large decline in economic activity, and that would come from a series of rate increases that the market is not expecting," he said in an interview with Seeking Alpha.
Regarding Fed policy, "I think the issue for them (the Fed) right now is not getting inflation to 2%, but preventing an economic catastrophe." The central bank could raise rates enough to bring inflation down to its goal, "but you would certainly have a very, very hard landing," he said.
Bankrate's Hamrick points out that the Fed now also needs to take into account other risks. "The future path of inflation will be key for the Federal Reserve as it decides whether any further interest rate increase is warranted, in their view," he said. "Chairman Jerome Powell and his colleagues remain focused on inflation but have been forced to be more attentive to financial stability after recent bank failures."
Sparking volatility : With the Fed shifting to a meeting-by-meeting approach for its rate decisions and insisting that the data will inform those decisions, each economic datapoint could spark market volatility , said Mott Capital Management's Michael Kramer.
"The CPI swaps market forecasts a significant drop in inflation between now and June, with the year-over-year rate of change falling to around 3% and remaining between 3 and 3.5% until the end of 2023," Investing Group Leader Kramer said. "This makes the April number somewhat crucial, as the swaps market has generally been repricing inflation rates higher throughout the year."
Shelter factor: 180 Degree's Rendino said he'll be focusing on shelter costs in the April report. "Shelter's an issue and I don't see rents coming down all that much," he said. He doesn't see a path to 2% inflation unless there's a significant decline in housing prices.
"March 2023 may finally mark the peak of shelter costs," the National Apartment Association said in its Inflation Tracker. Shelter costs were stable in March at an 8.8% increase in rent and an 8.0% increase in owners' equivalent rent, both matching the previous month's levels.
"Rent costs are expected to decelerate in the coming months, lagging private sector data trends which began in Q3 2022," the NAA said.
Rather than raising its policy rate anymore and risking a recession, Rendino says the Fed "should be focused just on they're own balance sheet — shrinking it — that's what they should be doing."
See why SA Investing Group Leader Danl Sereda expects that the consensus estimates for April CPI may be too optimistic, and could lead to the repricing of forwarding fund rates.
More on Inflation:
- Stifel boosts S&P target, predicts sharp drop in inflation
- U.S. consumers scale back inflation expectations for year ahead, NY Fed says
- March core PCE price index inflation held steady
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April CPI report may show little, if any, progress in slowing inflation