Wednesday's report is expected to show little progress against inflation

The Consumer Price Index, which measures the costs of a broad basket of goods and services across the $27.4 trillion U.S. economy, is expected to record increases of 0.3% for both the all-items measure as well as the core measure that excludes volatile food items. And energy.

On a 12-month basis, that would put inflation rates at 3.4% and 3.7% respectively, a 0.2 percentage point increase in the headline rate compared to February, and just a 0.1 percentage point fall in the core rate, both of which are still a long way off. reachable. From the central bank's target of 2%.

“We're not going there fast enough or convincingly enough, and I think that's what this report will show,” said Dan North, chief economist at Allianz Trade North America.

The report will be released at 8:30 a.m. ET.

North said he expects Fed officials will view the report in much the same way, supporting comments they have been making for weeks that they need more evidence that inflation is convincingly on track to 2% before interest rates can be cut.

“Moving convincingly toward 2% doesn't just mean achieving 2% for one month,” North said. “It means achieving 2% or less for months and months on end.” “We're a long way from that, and maybe that's what will happen tomorrow, too.”

To be sure, inflation has come down significantly from its peak of over 9% in June 2022. The Fed issued 11 interest rate increases from March 2022 to July 2023 totaling 5.25 percentage points to the benchmark overnight borrowing rate known as the federal funds rate.

But progress has been slow in the past few months. Indeed, the headline CPI has barely budged since the central bank stopped raising interest rates, even though the core index, which policymakers consider a better measure of longer-term trends, fell by about a percentage point.

While the Fed monitors the CPI and other indicators, it focuses more on the Commerce Department's personal consumption expenditures index, sometimes referred to as the personal consumption expenditures deflator. This showed headline inflation at 2.5% and the core rate at 2.8% in February.

For their part, markets have become nervous about the inflation situation and how it will affect interest rate policy. After posting big gains at the start of the year, stocks have fallen over the past week or so, which has seen sharp swings as investors tried to make sense of conflicting signals.

Earlier this year, traders in the federal funds futures market were calculating the possibility that the central bank would start cutting interest rates in March and continue with up to seven cuts before the end of 2024. The latest prices suggest that there will be no cuts. They run through at least June and total no more than three, assuming quarter-percentage point increases, according to CME Group FedWatch mathematical calculations.

“I don't see a lot here that's going to magically move things the way they want,” North said.

There will be some key areas to watch in Wednesday's report.

Beyond the headline numbers, trends in items such as shelter, airline tickets and vehicle prices will be important. These areas have been leaders during the current economic cycle, and moves in either direction could indicate longer-term trends.

Economists at Goldman Sachs expect an outright decline in air travel-related items as well as vehicle sticker prices, and see smaller increases in the cost of shelter, which makes up about a third of the CPI's weight. However, a New York Fed poll on Monday showed a sharp rise in expectations for rental costs over the next year, which represents bad news for policymakers who have often pointed to a slowdown in housing costs as a cornerstone of their inflation-easing thesis.

Likewise, the March National Federation of Independent Business survey, released Tuesday, showed confidence among small businesses at its lowest level in more than 11 years, with owners citing inflation as their top concern.

“Inflation is cumulative, which is why prices are still high,” North said. “People still can't believe how high the prices are.”

Gas prices could also play an important role in the CPI release after rising 3.8% in February. Although the gasoline index has been relatively unchanged over the past two years, it is still up more than 70% from April 2020 when the short Covid-induced recession ended. Food prices rose by about 23% during the same period.