Inflation data is due up next
The Fed's preferred measure of inflation is PCE but the CPI report correlates very well and the trend is almost always in the same direction.
At this time last year, the Yellen Fed was frequently complaining about quirks and seasonality in inflation data. Now the tables are turned, as those quirks roll out, the numbers are boosted in the other direction. That was just starting in April, but it will ramp up through July.
That's one of the reasons why year-over-year CPI is forecast to rise to 2.5% from 2.4%. The shorter-term trend is also positive with month-over-month CPI expected to climb 0.3% after a 0.1% dip in March.
The details of the report will be critical. Economists will attempt to pick out some of the causes of one-off drags that are rolling off, like mobile-phone services plans. In March 2017, that measure fell 7% in a single month.
Other quirky areas to watch that had sizeable moves in March:
- Energy prices fell 2.8% in March, that likely reversed
- Apparel prices fell 0.6%
- Airfares rose 0.6%
- Shelter costs rose 0.4%
- Hotels jumped 2.3%
- Medical expenses +0.4%
Also note today's PPI report. It was soft at 2.6% y/y versus 2.8% expected with core measures also missing estimates.
The Fed has recently hinted they will allow inflation to run a bit hotter without deviating from its rate hike path but in the eyes of the market, the Fed doesn't really plan three more hikes this year. There will be considerable appetite from the Fed for at least two more hikes but the third one (and hikes in 2019) will depend on how growth and inflation develop.
One thing that may be slowly factored in is the recent US dollar strength. That could have a dampening effect on inflation in the months ahead, but won't affect April data.