Domestic US Consumer Price Index (CPI) is likely to indicate low, stable inflation. This is all occurring against the backdrop of an economy grappling with continued supply-chain disruptions and the recent US-China trade negotiations. The US Department of Labor Statistics collects and makes public CPI data on a monthly basis. These April numbers are forecast to come in at 2.4% yr/yr, equal to March’s result. This stability comes amidst the Federal Reserve’s aim to maintain inflation around 2% year-over-year (YoY) in accordance with its mandate.
On an adjusted, March-over-March, annualized basis, super core inflation just fell to a four-year low of 2.9% YoY. This drop represented an enormous change from February’s rate of 3.8%. Analysts see more sustained price pressures having recently picked up. At the same time, the Fed has remained hawkish on monetary policy, even with high level negotiations underway that could lead to a resolution of current tariffs and improved inflation metrics.
Current CPI Projections
Both CPI and core CPI are expected to increase by 0.3% m/m in April. Core CPI inflation, excluding the more volatile food and energy categories, is expected to remain at 2.8% y/y. This number is in line with the rate from last month. All these figures point to a solidly stubborn consumer price environment amid a lot of volatility in other economic data points.
Watch super core (core nonhousing services), an important gauge of underlying inflation. As a result, in March, super core inflation dropped to a four-year low at 2.9% YoY vs. 3.8% in February. As we noted last fall, analysts at BBH cautioned that escalating higher tariffs would short circuit the nascent disinflationary trend. Specifically, they focused on how increased tariffs can be driving up inflation.
The Federal Reserve’s decision to maintain the federal funds rate at 4.25%–4.50% at its May meeting. This decision further draws attention to its timidity in light of today’s news. Even an unexpected jump in the year-over-year headline CPI could lead to renewed shifts in policy direction. These changes would be seismic in their effect on the dollar’s value.
Impact of Trade Negotiations
Whether characterized as a detente or a thaw, the recent US-China relations talks made substantial headway on both sides. To that end, both countries recently declared a 90-day moratorium on new tariffs. According to the joint statement released after their high-level negotiations in Geneva, new tariffs would be reduced by 115 percentage points. If realized, this new advance would relieve some of the supply-chain stresses being felt today that have exacerbated inflation.
The effect of these negotiations on future inflation rates are what’s most under the microscope by economists and policymakers across the board. Tariffs are one of the most powerful levers available to affect economic conditions. Since they are already experiencing a surplus, suspending them would provide targeted relief from inflation, which has stubbornly stayed at multi-decade highs.
Market analysts will be watching the consequences of these trade negotiations in parallel with each new monthly CPI data release. According to the CME FedWatch Tool, the chances for a 25 basis points June rate cut are down to 15%. This drop from about 34% at the beginning of the month reflects changing market expectations on what the Fed will announce in their next policy meeting.
Economic Landscape Ahead
As April’s CPI data approaches release, stakeholders remain vigilant about its potential implications for the Federal Reserve’s monetary policy and overall economic stability. The central bank is right to proceed with caution. The current trade negotiation landscape and inflation data suggest that changes may be on the way.
Investors and analysts are especially focused on what the inflation data will mean for interest rate expectations over the next few months. A stronger-than-expected CPI print would likely confirm market wagers that the Fed does away with their tightening plans through June. On the flip side, weaker than envisaged CPI prints would see higher chances for a more aggressive monetary easing.