March inflation report likely to show consumer prices remain elevated
March inflation data expected to show pervasive price pressures in US economy
The Fed risks 'overshooting' its inflation, rate hike goals: Diane Swonk
KPMG Chief Economist Diane Swonk says it's important to remember rapid rate hikes can exacerbate market fragility.
A high-stakes inflation report due Wednesday is expected to show that price pressures within the economy remained strong last month despite an aggressive interest rate hike campaign by the Federal Reserve.
Economists expect the consumer price index, which measures a basket of goods, including gasoline, health care, groceries and rent, to show that monthly prices rose 0.2% in March, down slightly from an increase of 0.4% February. On an annual basis, inflation is projected to have climbed 5.1% at an annual rate, a decline from 6% the previous month and a peak of 9.1% in June.
While that would mark the slowest pace of inflation since May 2021, it remains nearly three times higher than the Fed's 2% target.
Other parts of the report are also expected to point to a slow retreat for inflation, a worrisome sign for the U.S. central bank. Core prices, which exclude the more volatile measurements of food and energy, are expected to climb 0.4% or 5.6% annually, suggesting that underlying price pressures remain strong.
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"Core inflation, and core services, should remain sticky-high," Bank of America analysts wrote in a note Monday,
The report is the last before the Federal Reserve's next policy-setting meeting May 2-3 and will have major implications for the U.S. central bank, which is tightening monetary policy at the fastest rate in decades as it tries to crush out-of-control inflation.
Officials have already approved nine straight rate increases, lifting the federal funds rate to a range of 4.75% to 5%, the highest since before the 2008 financial crisis.
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Markets expect policymakers to approve another quarter-percentage point hike at the conclusion of their meeting next month despite upheaval in the banking system and concerns over a slowing economy.
A man shops for meat at a Safeway grocery store in Annapolis, Md., May 16, 2022. (Jim Watson/AFP via Getty Images / Getty Images)
The probability that the Fed continues its rate hike campaign in May rose to 71% Wednesday, according to data from the CME Group's FedWatch tool, up from 44.8% just one week ago. About 28% of traders, meanwhile, are expecting central bankers to pause the rate hikes.
"The Fed's policy should continue to have the desired impact on price pressures," said Michael Weisz, president of the investment firm Yieldstreet. "However, the target rate of 2% continues to be a long way off from the current path. The 'higher for longer' thesis may include both interest rates, as well as overall price levels, and thus slowing inflation may not happen as quickly as desired."
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Shoppers in a Kroger supermarket Oct. 14, 2022, in Atlanta. (Elijah Nouvelage/AFP via Getty Images / Getty Images)
The Fed is also watching other economic indicators, including job growth and consumer inflation expectations. In another welcoming sign for the central bank, there were indications the labor market softened but did not deteriorate last week.
The March jobs report showed employers added 236,000 jobs last month, the smallest gain since December 2020, and that monthly wages also cooled.
"Employment growth has not yet collapsed, though there are visible signs of continued moderation," said Kathy Bostjancic, Nationwide chief economist. "In all, the Federal Reserve will be pleased by the details of the employment report, but still is supportive of another rate hike in May, which we think could be the last for the tightening cycle, followed by a long pause."