Tuesday’s Vital Inflation Report Preview: Timing, Predictions, and Anticipated Reactions

YoY headline inflation forecasted to rise by 3.1%, core by 3.7%.

The stock market anticipates a major shake-up with the imminent release of the inflation report by the Labor Department’s Bureau of Labor Statistics on Tuesday. Scheduled for 8:30 a.m. ET, this report holds significant implications, influencing everything from interest rates to household budgets.

The Wall Street Fear Gauge

Ahead of the highly anticipated inflation report, Wall Street experienced a surge in anxiety as evidenced by the market’s “fear gauge” on Monday. The CBOE Volatility Index, or VIX, which serves as a measure of market volatility and investor sentiment, surpassed 16 for the first time since February 21st.

What the Numbers Say

Economists are predicting a 0.4% rise in prices across a wide range of goods and services for the month of February, slightly surpassing January’s 0.3% increase. Similarly, core inflation is forecasted to see a 0.3% gain, indicating a slight uptick from the previous month.

On a year-over-year basis, headline inflation is expected to show a 3.1% increase, while core inflation is anticipated to rise by 3.7%. As core inflation excludes volatile items like food and energy, hence remains unaffected by temporary fluctuations, this metric provides a clearer picture of long-term inflation trends. Economists are particularly interested in whether core inflation will align with expectations, as it could influence the Federal Reserve’s decision-making regarding interest rates.

“Overall, a report in line with our expectations would keep the Fed on track to begin cutting rates at its June meeting,” Stephen Juneau, U.S. economist at Bank of America Securities, wrote in a research note. “Alternatively, if core CPI prints above our expectations, it would increase the likelihood of a later start to the cutting cycle.”

Looking Ahead

High interest rates don’t just slow down how prices increase; they also make it more expensive for people and businesses to borrow money, affecting everything from home loans to credit card debt. In summary, the Federal Reserve’s careful strategy, which has worked well until now, aims to control rising prices without causing economic downturns or significant job cuts. However, the resurgence of inflationary pressures may prompt the Fed to reassess its stance on rate cuts. Such a scenario would prolong higher borrowing costs and heighten the risk of a potential recession.

Investors are aware that inflation’s resilience is likely to dissuade the Federal Reserve from implementing rate cuts at its upcoming meeting in late April to early May, and possibly even throughout the summer.