New York
CNN
—
Persistent inflation remains the Federal Reserve’s No. 1 concern, even as the banking sector remains on edge after two big bank failures last month. This week’s Consumer Price Index, due to be announced Wednesday at 8:30 am ET, could determine whether the central bank raises rates again in May.
That means it will also weigh on markets, especially now that Wall Street’s focus has shifted from the financial system to the economy.
“Inflation is no less relevant than it has been for the past two years,” wrote Greg McBride, chief financial analyst at Bankrate. “The Consumer Price Index remains the most-watched monthly economic report.”
So what are they expecting?
What’s happening: Core inflation levels have eased for five months in a row on an annual basis, according to CPI readings, but they still remain near historic highs at 6% – well above the Federal Reserve’s goal of 2%.
Last month’s reading showed an increase in prices between January and February, which doesn’t “inspire confidence that 2% is just around the corner,” said McBride.
For March, economists forecast a 0.4% monthly increase in the CPI, which matches the September - February average and would keep those year-over-year averages high.
So what will it take to make the Fed, and investors, happy?
“To feel good about where inflation is headed, we need to see more than just moderation in the rate of both headline and core inflation,” said McBride. “We also need to see moderation in price pressures across a wide range of categories that are staples of the household budget: shelter, food, electricity, motor vehicle insurance, apparel, and household furnishings and operations.”
But “resiliently elevated prices have the potential to spark yet another Fed rate hike in May,” said Greg Bassuk, CEO at AXS Investments. That’s notwithstanding the slowing economy “that has been weighed down even more heavily by the banking system debacle,” he added.
What it means for markets: Between inflation data and the start to the first-quarter corporate earnings season (three of the largest US banks, JPMorgan Chase, Wells Fargo and Citigroup report this Friday), this week is set up for heightened stock volatility, said Terry Sandven, chief equity strategist at US Bank Wealth Management.
“Persistent inflation, rising interest rates and uncertainty over the pace of earnings growth in 2023 remain headwinds to advancing equity prices. Each will be in focus this week,” he said.