Preview of this month's US CPI numbers

On Wednesday we get the release of the US CPI numbers for March. Last month’s prints painted a somewhat mixed picture. Encouragingly, both the annual and monthly headline rates moved lower, falling 0.4% and 0.1% respectively, with the annual core rate also falling by 0.1%. However, on the downside, unfavourable rounding saw the monthly core rate rise by 0.1%, while the core services ex-housing reading – the Fed’s current obsession – rose by a more substantial 0.51%, the biggest monthly increase since September.

Despite this increase, the core services reading overall still managed to fall by 0.1%, bringing the annual figure to 6.2%. But this is only marginally lower than the 6.5% reading seen last September, a painstakingly slow pace of decline that will be disconcerting to the Fed given the degree of monetary tightening that has been delivered to date. Indeed, this decline proved insufficient to prevent the FOMC from tightening policy by a further 25bps last month, and unless this month’s numbers show a faster pace of decline, a similar scenario looks likely to play out in May.

This month, the headline monthly rate is forecast to fall to 0.2%, driven primarily by lower energy prices. However, this downwards pressure may prove to be only temporary following the decision taken by OPCE+ last month to cut oil output, a decision which has seen the WTI oil price rise by around $12pb to circa $80pb. This is still below the average price seen in 2022 of approximately $95pb, but the current direction of travel is upwards. Of key importance here is the way fluctuations in the price of oil feed into the PCE inflation number – another reading currently dear to the Fed’s heart – via their impact on items such as production and distribution costs.

Pre-covid, these changes typically showed up with a 3-month lag. Although Covid saw other drivers of inflation such as global food prices, margins etc, crowd out oil and prove more important, as the global economy recovers from the pandemic so oil prices will once again prove dominant. The Fed will be alert to this, and with the annual core CPI number forecast to rise by 0.1% to 5.6% on the back of stronger core goods numbers, unless we see an unexpectedly soft set of numbers tomorrow, the growing likelihood is that the FOMC will decide another 25bps hike is warranted in May.