A "triple whammy" of surging energy prices, a technical catch-up in rent data, and rising AI hardware costs is expected to push April's US inflation to its highest level since September 2023.
The US Consumer Price Index report, due Tuesday from the Bureau of Labor Statistics, is forecast to show headline inflation accelerated to a 3.7% annual rate. The consensus expects a 0.6% month-over-month increase, a slight moderation from March's 0.9% jump but still a sign of significant price pressure. Core inflation, which excludes food and energy, is projected to rise 0.4% from the prior month.
"Our economists expect headline inflation to rise by +0.58% month-on-month, moderating from March’s +0.9%, but still relatively firm," said Deutsche Bank’s Jim Reid. "In contrast, the core measure is projected to accelerate to +0.39% MoM from +0.2%, suggesting underlying price pressures remain sticky even as energy-related effects fade."
The data comes as markets are pricing a diminished probability of Federal Reserve rate cuts this year. The CME FedWatch Tool indicates a 73% chance the Fed's policy rate will remain at its current 3.5%-3.75% range by year-end, with a 20% probability of a 25 basis point hike. A hotter-than-expected core CPI print could see those odds shift further toward a hike, likely strengthening the US dollar.
At stake is the Fed's ability to begin easing policy. Investors will be watching the core figure to see if elevated energy costs are spilling over into the broader economy. While many analysts believe the Fed will look past one-off technical factors, persistent strength in core inflation could delay any potential rate cuts well into 2027, according to UOB Group analysts.
A Trio of Inflationary Pressures
This month's inflation reading is complicated by three distinct factors. The most unusual is a technical adjustment to housing data. Due to a government shutdown last fall, the BLS is now incorporating six months of rolled-over rent samples, which could add as much as 10 basis points to the monthly core CPI figure alone, according to estimates from Barclays. Bloomberg Economics calculates that without this distortion, the core CPI would be a more modest 0.24%.
The second, more conventional driver is energy. The barrel of West Texas Intermediate (WTI) crude rose more than 50% from the beginning of the US-Iran conflict on February 28 to the end of April. This drove a 11.6% monthly increase in retail gasoline prices, which will be a primary contributor to the headline CPI figure.
A third, less-publicized factor is the rising cost of technology hardware, driven by demand for artificial intelligence. Supply chain bottlenecks for components like memory chips and CPUs are pushing up prices for consumer electronics, a trend that runs counter to the disinflation seen in other core goods categories.
Fed on High Alert as Core Proves Sticky
Federal Reserve officials have made it clear they are prioritizing the fight against inflation. Minneapolis Fed President Neel Kashkari recently warned that a prolonged oil price shock could de-anchor inflation expectations and require a strong policy response. The market's focus will be squarely on the core CPI number to gauge whether these external shocks are creating more durable, underlying price pressures.
The market reaction will likely be felt most acutely in currency and bond markets. Eren Sengezer, an analyst at FXStreet, notes that the EUR/USD pair faces key resistance at the 1.1800-1.1820 area. "In case EUR/USD manages to stabilize above this region, 1.1900-1.1910 could be seen as the next hurdle," he said. Conversely, a break below the major support zone at 1.1730-1.1680 could trigger a technical sell-off.
Even if the core reading comes in cooler than forecast, relief for the dollar may be temporary. As long as the conflict in the Middle East remains unresolved, the risk of further energy-driven price shocks will keep traders on edge and may limit the Fed's willingness to signal a dovish pivot.
This article is for informational purposes only and does not constitute investment advice.
