Inflation Fears Re-Emerge as Markets Await CPI Reading
Investors are growing increasingly nervous about the Federal Reserve’s campaign to fight inflation and end the era of cheap money. This comes after the recent collapse of Silicon Valley Bank (SVB), which has sparked fears of contagion among other regional banks. These worries have been compounded by a mixed U.S. jobs report and the expectation of an inflation reading that could reignite these fears.
The U.S. Bureau of Labor Statistics will release the Consumer Price Index (CPI) for February at 8:30 ET on Tuesday, March 14. The median estimate among economists is a 6.0% increase in headline CPI and a 5.5% increase in core CPI, which excludes volatile food and energy prices.
The consensus forecasts suggest that the annual inflation rate will decline to 6.0% from 6.4% in January, while the Core CPI is expected to come in at 5.5%, down from 5.6% in the previous month. On a monthly basis, CPI is forecast at 0.4%, while Core CPI is also expected at 0.4%.
The Fed has hiked interest rates by a cumulative 4.5% over the past year in an effort to quell inflation. However, the US jobs report eased some worries about a 50-basis point rate hike at the Fed’s upcoming meeting.
The New York Fed’s Survey of Consumer Expectations results released in February showed that the median one-year-ahead inflation expectation dropped by 0.8 percentage point to 4.2%, the lowest reading since May 2021. Expectations for inflation three years ahead were unchanged at 2.7%, while the median expectation for five-year inflation increased 0.1 pp to 2.6%.
Investors are now waiting to see how Tuesday’s inflation data will affect the Fed’s rate decision at the March 22 meeting. A hotter-than-expected inflation reading could reignite fears among investors already on edge after the failure of SVB. If the data comes in as expected, the Fed is likely to raise rates by 25 basis points.
The US stock market is facing a critical test next week as markets await the release of the CPI. While the Fed’s interest rate hikes are meant to quell inflation, the collapse of SVB has exposed vulnerabilities that could grow if the Fed continues to raise rates.
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