The "Inflation Week" in the United States officially begins, with the Consumer Price Index (CPI) on Tuesday, the Producer Price Index (PPI) on Wednesday, and import price data on Thursday all scheduled for release this week. These figures will directly influence assessments of the Federal Reserve's policy trajectory.
Matt Hornbach, Global Head of Macro Strategy at Morgan Stanley, warned on Monday that the April CPI data to be released on Tuesday would present a "more volatile" profile.
He also emphasized that what the market truly needs to focus on is the combined impact of all this week's inflation data on the forecast for the Personal Consumption Expenditures (PCE) price index, the Federal Reserve's preferred inflation gauge. Morgan Stanley currently maintains its baseline forecast that the Federal Reserve will hold rates steady this year.
US Treasury yields have been rising recently, reflecting traders' concerns about the inflation outlook. The Federal Reserve's Federal Open Market Committee (FOMC) will hold its next policy meeting on June 16-17, where policymakers will confront a batch of dense inflation-related data.
CPI May Be "Warmer," with Oil Prices and Rent as Main Drivers
Bloomberg Economics anticipates that both the headline and core CPI readings for April will be "warmer," primarily driven by two factors: first, the war in Iran pushing up gasoline and airfare prices; and second, the US Bureau of Labor Statistics (BLS) will correct data distortions from last October caused by the government shutdown, leading to a one-time surge in rent inflation.
Economists surveyed by Bloomberg predict that the headline CPI for April will increase by 0.6% month-over-month, down from 0.9% in March; the core CPI is expected to rise from 0.2% to 0.3% month-over-month. The BLS will release the April Producer Price Index (PPI) on Wednesday, with import price data to follow on Thursday.
Matt Hornbach noted that the CPI, PPI, and import price data each contribute in different ways to forming the forecast for PCE, stating, "That is the number that truly matters for the Federal Reserve."
Degree of Corporate Cost Pass-Through May Be Lower Than Expected
Despite expectations for warmer inflation data, Hornbach expressed caution regarding whether costs can be effectively passed through to consumers. He stated that it remains unclear whether businesses are currently passing on additional costs to consumers, and the degree of pass-through may be lower than previously anticipated.
Hornbach pointed out that businesses are currently facing broader cost pressures, including rising energy costs and increased inputs related to artificial intelligence infrastructure development.
Using the "Emancipation Day" tariffs as an example, he noted that many economists at the time expected businesses to pass tariff costs on to consumers, but the actual degree of pass-through fell far short of expectations.
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