A report on the Consumer Price Index (CPI) from the largest economy in the world is one of the macroeconomic indicators that traders and investors need to keep an eye on in the upcoming week. The incredible equities market rise could be derailed by a CPI report that is higher than anticipated.

Inflation Concerns in the United States

Despite the market’s tendency to imply otherwise, inflation concerns are not totally off the radar in the United States. As said in Friday’s Wrap, everything is going well. Considering the possible issues Jerome Powell and his colleagues faced with the supply chain and oil prices, last year’s revision didn’t exactly cause a stir.

But in macro-policy, the crucial question remains unanswered: Is the track of U.S. inflation heading towards sustainability and in line with the Fed’s definition of price stability? If not, a large amount of investor capital rests on the continuing disinflation trend, which adds a significant policy event risk to the mix. I understand we shouldn’t place all of our eggs on one data point, but throw up the towel if this print appears hot.

Thankfully, the yearly changes announced on February 9 were minimal. The market quickly refocused, emphasizing the importance of events that did not occur rather than those that did, with no effect on expectations of the timing of the Fed’s first-rate cut.

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Market Expectations Amidst Fed’s Rate Cut Speculations

The markets are only pricing in about a 20% chance of a rate cut at the FOMC meeting the following month. Even while the Fed attempts to suggest that there is virtually no chance of a cut, astute watchers know that unforeseen circumstances can quickly alter the situation, especially when regional banks and commercial real estate (CRE) considerations are competing for attention.

The 20% chance of an early rate cut—by which, in this case, we mean March—indicates that most traders don’t think the CPI data will have a big impact on the Fed’s decision this week. For the balance to shift in favor of an early rate decrease, several dovish developments would probably need to occur. It might include a disastrous February jobs report, an unanticipated incident like the regional bank collapse in March 2023, or an unexpectedly large CPI downside miss. The probability of a rate drop in March would need to be reevaluated if one or both of these possibilities came to pass.

Predictions and Analysis for U.S. Core Consumer Price Index

Regarding risk sentiment, the real discussion doesn’t center on whether or not the Fed will lower interest rates in a few weeks. Rather, the focus is on whether the rate cut’s magnitude matches what the market had anticipated. To avoid passive tightening through the real rates channel, some market experts are evaluating the potential that the Fed may only lower rates by 75 basis points.

The good news is that U.S. inflation most likely declined at the start of the year, supporting predictions that the Federal Reserve may take interest rate decreases into consideration in the upcoming months.

CPI Report: Stability of Global Supply Chains and Its Impact on Policy

To give a more accurate picture of underlying inflation, the core consumer price index, which does not include food and fuel, is predicted to rise by 3.7% in January over the same month last year. This would demonstrate the work made by Fed Chair Jerome Powell and his colleagues in resolving inflation worries since it would be the smallest year-over-year gain since April 2021. According to economists’ projections for Tuesday’s report, the overall CPI is expected to climb by less than 3% for the first time in almost two years.

 

According to the New York Fed’s Global Supply Chain Pressure Index (GSCPI), which was released last week, supply networks were still running well. This gave central bankers more peace of mind. This index offers insightful information about the robustness and overall health of global supply chains, which are essential to the modern economy. Policymakers find comfort in the fact that supply networks operate efficiently, particularly in light of anecdotal worries over cargo evading Red Sea shipping lines.

Conclusion: Fed’s Caution Amidst Optimistic Signs

Since the spring of last year, the GSCPI has gradually risen, with a temporary spike above average levels in November. The main cause of this increase was the rise in shipping costs brought on by the terrorist attacks on cargo ships in the Red Sea. But since then, the index has decreased, as evidenced by the Baltic Dry Index, which shows a notable 56% drop in transportation costs. Furthermore, the GSCPI’s components of order backlogs and delivery times from U.S. industrial suppliers have also improved. The supply chain front seems durable and stable for the time being, despite persistent geopolitical tensions and interruptions. (BMO).

In summary, before proclaiming the goal done, the Fed still needs additional time and data on wages, prices, and demand to determine if inflation will sustainably return to the target. However, they are glad supply chains are still helpful and cooperative.