The upcoming Consumer Price Index figures for March will be closely analyzed by Federal Open Market Committee members ahead of their next meeting on May 1. No change in interest rates is expected at the meeting. But relatively benign inflation data could pave the way for a summer interest rate cut, according to the expectations of most FOMC officials and fixed-income markets.
Upcoming Inflation Data
The CPI report for March 2024 will be released by the Bureau of Labor Statistics on April 10 at 8:30 a.m. ET. As of February’s CPI report, annual inflation is 3.2%, or 3.8% excluding food and energy. That data compares with the FOMC’s annual inflation target of 2%.
The Bureau of Economic Analysis will release related Personal Consumption Expenditures inflation data for March on April 26. PCE inflation is running at a 2.5% annual rate for February and 2.8% with food and energy excluded. Generally, inflation has fallen substantially from peak levels, but the Fed is concerned it’s still materially above policymakers’ 2% target.
Nowcasts Of Inflation Reports
Nowcasts currently suggest March inflation data will come in at 0.34% for CPI and closer to 0.25% for PCE. Stripping out food and energy prices, the corresponding nowcasts are currently 0.31% and 0.23%, respectively.
These inflation nowcasts are modeled by the Federal Reserve Bank of Cleveland’s research team, using current prices to estimate where inflation reports will fall. Should these nowcasts hold, it would represent some disinflation from January’s elevated monthly inflation numbers. However, this would still correspond to inflation running above the Fed’s 2% annual goal. The main question for the Fed is whether inflation is trending toward its target or not. There is some concern that inflation may get stuck above the Fed’s goal, which may encourage policymakers to hold rates higher for longer.
Separately, event forecasting site Kalshi currently projects a slight acceleration in CPI inflation for March to a 3.3% annual rate.
CPI Components
Federal Reserve policymakers will be paying attention to the underlying components of inflation, especially in the detailed pricing tables of the CPI report.
First off, shelter prices will be closely watched. These costs make up a large component of most household budgets, and hence they carry a large weight in the CPI index. Despite some overall flattening in U.S. home prices since May 2022, according to the S&P CoreLogic Case-Shiller U.S. National Home Price Index, shelter costs in the CPI index have continued to rise.
For example, annual shelter costs have risen at an annual 5.7% rate, according to February’s CPI release. This contrasts with a cooling national home price series, which CPI data has not reflected in recent reports. For example, national home prices fell in late 2022 and early 2023, before recovering somewhat. But, the CPI series has not reflected that trend, instead showing a consistent increase in shelter costs in recent years. The rental calculation method used by the CPI is believed to introduce a lag to current home prices.
Fed officials are relatively confident that home prices will ultimately cool in the CPI index. But they have been waiting for this to occur for some time. If this does happen, it may help inflation trend closer to the Fed’s 2% goal, given the large weight of shelter costs in the CPI index.
Even beyond housing costs, services costs remain a concern for the Fed. Accelerating wage levels have fueled higher services prices over recent years and the Fed is looking for these prices to cool. The Atalanta Fed’s Wage Growth Tracker suggests that U.S. wage growth is cooling. However, its estimate for February was still 5%.
Trends in goods pricing will also get some attention. Various commodities, used cars and household goods have fallen in price over the past 12 months to February helping pull overall inflation down. However, there’s a belief that good deflation is temporary and falling prices in these categories may come to an end. If so, this would impede progress toward the Fed’s 2% inflation goal.
What To Expect
Provided inflation comes at a monthly rate close to 0.3% or lower for March, that should be sufficient for the FOMC to keep its plan to start cutting interest rates this summer. If the report shows a 0.4% monthly increase or greater, that would be a concern. It would suggest relatively high inflation readings seen in January, and to a lesser extent in February, are perhaps more of a trend.
Monthly inflation at or below 0.2% would generally be considered positive news, perhaps giving more conviction to rate cutting plans. Still the CPI release is just one data point that the Fed will use to assess how inflation is trending. The FOMC will also keep a close eye on the jobs market, which so far has been strong enough to enable the Fed to be patient in considering interest rate cuts. A slowdown in job growth might matter for the Fed’s plans as much as upcoming inflation data releases.
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