The year started with uncomfortably high inflation for the third time in a row. Economists hope new data on Wednesday will finally bring signs of calm.
Forecasters expect the Labor Department report to show the consumer price index rose 3.4% in April from the same month last year. If that happens, the inflation rate will slow slightly from 3.5% in March.
Economists tend to focus on other measures of inflation that remove volatile food and fuel prices to get a better picture of underlying trends. They expect the “core” measure of prices to rise 3.6% year-on-year, which would be the lowest annual reading since the beginning of 2021.
Wednesday's numbers have important implications for Federal Reserve policymakers who are considering when and whether to cut interest rates.
Inflation fell sharply last year, raising hopes that the Fed's efforts to rein in price increases without triggering a recession are proving successful and that the central bank may soon start cutting rates. But progress has since stalled, and investors have largely given up hope for a rate cut by September.
Even with Wednesday's encouraging inflation report, this situation is unlikely to change. But it could be a step toward giving policymakers confidence that inflation is returning to normal before they start cutting interest rates, currently set at about 5.3%. says it is necessary.
“It feels like a big deal,” said Sarah House, senior economist at Wells Fargo. “The moment of truth is whether the Fed will cut interest rates this year,'' she said.
But if April's price data is higher than expected, as has happened repeatedly in recent months, policymakers could conclude that high interest rates need more time to revive inflation. . Speaking at an event in Amsterdam on Tuesday, Federal Reserve Chairman Jerome H. Powell reiterated that recent inflation numbers have made him more cautious about cutting interest rates.
“We didn't expect this to be a smooth road, but I think it's been higher than anyone expected,” he said. “What this tells us is that we need to be patient and make restrictive policies work.”
Any further delays would be bad news for investors who have been hoping for lower interest rates and for low- and middle-income Americans who are increasingly struggling to cope with the burden of rising borrowing costs. As credit card interest rates soar, the percentage of borrowers who are behind on their credit card bills is increasing, according to data released Tuesday by the New York Fed.
Economists see reason for optimism. The unexpected rise in inflation in March was driven in part by large price increases in several specific categories, such as auto insurance and health care. These gains are unlikely to persist at this pace for more than a few months. And inflation in recent years has tended to slow down as the years progress.
But it turns out that one part of the economy has been particularly depressed lately: housing prices. For more than a year, forecasters have been predicting a moderation in the government's housing inflation indicators, citing private data showing a slowdown in rent growth.
Instead, housing costs in the consumer price index continue to rise rapidly, especially for homeowners. And now some measures in the private sector are starting to turn around as well.
“The view on rents was that they would continue to soften as 2024 progresses,” said Rick Palacios Jr., research director at real estate data firm John Barnes Research and Consulting. “We don't know that. If anything, we see it picking up.”
Housing costs are by far the largest monthly expense for most families, which means they play a huge role in calculating inflation. If rents continue to rise at their current pace, it will be difficult for overall inflation to return to normal.
The Fed has so far been successful in combating inflation without significantly damaging the labor market, contrary to expectations that high interest rates would cause a significant increase in unemployment.
But as the battle drags on, some economists are once again concerned that the Fed may prove unable to fully control inflation without slowing the economy to the point where people lose their jobs. Employment growth in April was slower than expected, and the unemployment rate rose gradually.
“The labor market has held up extremely well,” House said. “But the longer we keep interest rates where they are, the more insecure it becomes on the labor market front.”