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Inflation Data to Watch as Fed Considers Interest Rate Hike


Economists are expecting the annualized Consumer Price Index (CPI) in the US to decline to 6.0% in February, while the Core CPI, which excludes volatile food and energy prices, is seen at 5.5% from 5.6% in the prior month.[0] Analysts forecast headline CPI to rise by 0.4%, lower than January’s 0.5%, while core CPI is expected to increase by 0.4%, the same as January.[0] The market’s expectations for the federal-funds effective rate at the Fed’s upcoming March 22 meeting are roughly split between a quarter-point and half-point rise.[1]

The Federal Reserve has hiked interest rates by a cumulative 4.5% over the past year in an effort to quell inflation as Fed Chair Jerome Powell commits to aggressive monetary policy. Last week, Powell said the U.S. central bank is likely to raise rates higher than previously expected if upcoming data shows that the economy remains hot after almost a year of tightening, but added that no decision has been made yet about the upcoming March meeting.

The core consumer price index, which excludes food and energy and provides a better sense of underlying inflation, is forecast to rise 0.4% for a third straight month in February with a 5.5% gain from a year ago. It is predicted that core and overall inflation will increase by 0.4% for the month, bringing the year-to-date figures to 5.5% and 6.0%,

The data to watch in the coming week includes February figures on retail sales, producer price inflation, housing starts and industrial production. This upcoming week, the U.S. will be releasing data on producer prices, housing starts, industrial production, and consumer sentiment for February, as well as the first report on March consumer sentiment.

Investors now expect the central bank to raise interest rates by 25 basis points, or 0.25%, at its March 22 policy meeting.[2] However, if the Fed chose not to respond to higher-than-expected inflation, then long-term inflation expectations that are embedded into all U.S. securities of intermediate-to-long duration could rise significantly thereby significantly raising the long-term cost of funding and discount rates throughout the U.S. economy.[3]

As this week’s inflation and retail sales data come in, the market will have a better idea of whether the Fed will continue to raise rates or take a pause.[4]

0. “Crucial US inflation foreseen sticky by bank analysts” FXStreet, 13 Mar. 2023, https://www.fxstreet.com/news/us-inflation-forecast-easing-only-slowly-still-sticky-previews-by-10-banks-202303131227

1. “Commodities Week Ahead: Oil, Gold Caught Between Slow-Boil SVB Crisis, CPI” Investing.com, 13 Mar. 2023, https://www.investing.com/analysis/commodities-week-ahead-oil-gold-caught-between-slowboil-svb-crisis-cpi-200636149

2. “Inflation data arrives at critical moment for Fed after bank failures, jobs data” Yahoo News, 13 Mar. 2023, https://news.yahoo.com/inflation-data-arrives-at-critical-moment-for-fed-after-bank-failures-jobs-data-192322720.html

3. “The Critical Significance Of The March 14 CPI Report” Seeking Alpha, 13 Mar. 2023, https://seekingalpha.com/article/4587092-the-critical-significance-of-the-march-14-cpi-report

4. “Markets Brief: The February CPI Report Holds the Key to the Fed’s Next Move” Morningstar, 10 Mar. 2023, https://www.morningstar.com/articles/1143551/markets-brief-the-february-cpi-report-holds-the-key-to-the-feds-next-move

Forecast Future Price Action
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