What to watch in the April US inflation report
Markets are keenly awaiting the April US inflation report, likely to prove the key event for the week.
Pressure on Fed as consumer prices stay elevated
According to early forecasts, consumer price inflation as measured by the consumer price index (CPI) likely rose 3.4% over the year in April. While down slightly from the 3.5% annual increase in March, this figure is still well above the Federal Reserve's (Fed) target of 2% inflation.
The Fed Bank of Cleveland's "nowcast," which projects the CPI based on incoming economic data, aligned with these forecasts by calling for a 3.5% annual CPI increase as of Friday. Either projection would signal that inflation remains stubbornly elevated.
No progress on stalled inflation
Prices have continued rising faster than expected through the first three months of 2023, stalling the progress made in lowering inflation levels that fell significantly last year. The persistent high inflation has strained household budgets due to steeper prices for essentials like gas and groceries.
Elevated inflation has also forced the Fed to delay cutting its benchmark interest rate from the 23-year high where it has been held since last July. Higher interest rates have kept borrowing costs elevated for mortgages, auto loans, credit cards and other consumer debt.
Downward trend in inflation yet to appear
Fed officials have stated they are waiting to see clear signs that inflation is on a firm downward trajectory before considering cutting the Fed funds rate. Economists at Bank of America wrote that inflation matching the forecasts would likely keep the Fed from lowering rates before December.
Rising gasoline prices in April were a key factor likely fuelling stubbornly high inflation for the month, according to the Bank of America economists.
Core inflation to slow in April
However, some details in the forthcoming inflation report may prove more encouraging. Consensus estimates call for "core" inflation, which strips out volatile food and energy costs, to have risen 0.3% in April, down from the 0.4% monthly increase in March. Economists closely watch core inflation as an indicator of broader inflation trends.
Declines in used car prices a good sign
Additionally, economists found an optimistic sign in the used car market, where wholesale prices at auctions fell 2.3% in April according to Mannheim data provider. This represented a 14% annual decline. Used car prices hold significant sway over the overall inflation level.
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