Benzinga - by Shanthi Rexaline, Benzinga Editor.
The highly anticipated consumer price index (CPI) report for March is due on Wednesday, and the data could cause market fluctuations due to its potential impact on near-term Federal Reserve interest rate decisions.
Inflation Forecast: Economists generally predict a slight slowdown in the month-over-month inflation rate, with consumer prices and the core reading potentially rising by 0.3% in March compared to 0.4% in February.
However, on a year-over-year basis, inflation is expected to pick up slightly, with an average forecast of 3.4% growth compared to 3.2% in February. The core annual rate, which excludes volatile food and energy prices, might show a slight decrease from 3.8% to 3.7%.
Pretty Significant Event: Value investor and New York University Professor Aswath Damodaran said, “I am more worried than I was a couple of months ago..or even six weeks ago.” Although earnings estimates have been going up almost consistently over the past three months, inflation seemed to be much more stubborn than what people had factored in at the start of the year, he said in a CNBC interview.
“So I think tomorrow’s [Wednesday’s] numbers are going to be pretty significant in where the market goes next, and to be quite honest, that’s where inflation goes the rest of the year,” the professor said. “It’s going to drive the market, not what the Fed does, [or] it does not do.”
Damodaran said if the numbers come in hotter than expected, it may not necessarily signal the end of the rally. This is because investors have already pulled back and there were now a lot more skeptics in the market more than six weeks ago, he said.
A hot inflation number may give them another reason to stay on the sidelines, the economist said. “So I think it’s going to be not necessarily “the” event but it’s going to be one of a series of events. Just as we do with the collection of inflation announcements that got us into trouble, this is going to be one more piece of information we use to make a judgment on, now, where’s inflation going,” he added.
Rising Commodity Prices: While concurring with the consensus view of the annual core rate slipping to 3.7%, Jeremey Siegel, Emeritus Professor of Finance at the Wharton Business School and Senior Economist at WisdomTree, said a lower reading could bring a “nice equity rally.”
The economist said he would focus on the shelter component of inflation. The Bureau of Labor Statistics has overstated the number and this component has been accounting for two-thirds of the year-over-year increase, he said.
Siegel is wary of the recent rise in commodity prices. “I don’t think that this is a precursor to another inflationary period, but rather it's from the strength of the economy…This bears watching but is not yet a negative,” he said.
Tech Trouble Ahead? A hotter-than-expected March inflation number would bode ill for tech stocks, said Deepwater Asset Management’s Gene Munster. In a post on X, the venture capitalist said, “A hot CPI number tomorrow [Wednesday] is going to be a headwind to tech stocks.
That said, he wasn’t unduly worried about a pullback. “That headwind should be short-lived. The power of AI paradigm shift outweighs rates higher for longer,” he said.
Inflation Wave ‘Broken’: Nobel laureate Paul Krugman said in a New York Times op-ed that “while there was a wave of inflation, it seems to have broken.” The downtrend is more evident if inflation is measured in the same way as it is elsewhere, the economist said. He was referring to the harmonized index of consumer prices, which does not include the owners’ equivalent rent – an “imputed cost of housing that nobody actually pays and is a lagging indicator.”
By this measure, inflation has already been lowered to roughly 2%, which is the Fed’s target, Krugman said.
“Basically, America rapidly restored full employment while experiencing a one-time jump in the level of prices without a sustained rise in inflation, the rate at which prices are rising,” he said.
The U.S. policymakers have more or less got it right, Krugman said, but he thinks it was a “lucky accident.”
The iShares TIPS Bond ETF (NYSE:TIP), an ETF tracking the investment results of an index composed of inflation-protected U.S. Treasury bonds, ended Tuesday’s session up 0.26% at $106.87, according to Benzinga Pro data.
Read Next: Larry Summers Says There’s Still A ‘Real Possibility’ Of A Fed Move Higher: ‘Would Be An Inappropriate Act To Cut Rates’ At June Meeting
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