This year began with three consecutive uncomfortably high inflation readings. Economists hope that new data on Wednesday will finally bring signs of a cooling.
Forecasters expect the Labor Department report to show that the consumer price index rose 3.4 percent in April from a year earlier. That would mark a slight slowdown from the 3.5 percent inflation rate in March.
Economists tend to focus on a separate measure of inflation that excludes volatile food and fuel prices to give a better idea of the underlying trend. They expect that “basic” measure to show prices rose 3.6 percent from a year earlier, which would be the lowest annual reading since early 2021.
Wednesday’s data has crucial implications for Federal Reserve policymakers, who are weighing when (and even whether) to cut interest rates.
Inflation fell rapidly last year, raising hopes that the Federal Reserve was about to succeed in its effort to curb price increases without causing a recession, and that the central bank could soon begin cutting rates. of interest. But progress has since stalled and investors have all but given up hope for rate cuts before September.
An encouraging inflation report on Wednesday is unlikely to change that. But it could be a step to give policymakers confidence that inflation is returning to normal, something they have said they need before they start cutting rates, which are currently set at around 5.3 percent.
“It seems like a big deal,” Sarah House, senior economist at Wells Fargo, said of the report. “It’s a make-or-break moment if the Fed is going to cut this year.”
But if April price data is more positive than expected (as has happened repeatedly in recent months), policymakers could conclude that high rates need more time to rein in inflation. At an event in Amsterdam on Tuesday, Jerome H. Powell, chairman of the Federal Reserve, reiterated that recent inflation readings had made him more cautious about cutting rates.
“We didn’t expect this to be an easy road, but I think they went higher than anyone expected,” he said. “What that has told us is that we will have to be patient and let the restrictive policies do their job.”
Any further delay would be bad news for investors, who have been eagerly anticipating lower rates, and for low- and moderate-income Americans, who are increasingly struggling to manage the burden of higher borrowing costs. Data from the Federal Reserve Bank of New York on Tuesday showed that a growing share of borrowers are falling behind on their credit card bills as rates on those debts have skyrocketed.
Economists see reasons for optimism. The unexpected spike in inflation in March was driven in part by large price increases in some specific categories, including auto insurance and health care. Those gains are unlikely to persist at that pace for more than a few months. And in recent years inflation has tended to decrease as the year progresses.
But prices in one part of the economy have been particularly persistent lately: housing. For more than a year, forecasters have been predicting that the government’s measure of housing inflation would decline, citing private sector data showing rent increases are slowing.
Instead, housing costs in the Consumer Price Index have continued to rise rapidly, particularly for homeowners. And now some private sector measures have also begun to show an uptick.
“The narrative around rents was that they were going to continue to weaken as 2024 progressed,” said Rick Palacios Jr., research director at John Burns Research and Consulting, a real estate data firm. “We don’t see that. In any case, we see that he is recovering.”
Housing is by far the largest monthly expense for most families, which means it also plays a huge role in inflation calculations. If rents continue to rise at the current rate, it will be difficult for headline inflation to return to normal.
The Federal Reserve has so far managed to wage its war on inflation without causing much damage to the labor market, defying predictions that high interest rates would inevitably cause a big rise in unemployment.
But as the fight drags on, some economists worry again that the Federal Reserve will be unable to fully control inflation without slowing the economy so much that people lose their jobs. Job growth slowed more than expected in April and the unemployment rate has gradually risen.
“The job market has held up very well,” House said. “But the longer we keep interest rates where they are, the more concerned I am on the labor market side.”