The Fed’s next inflation report could show easing of core inflation

The report’s set of figures will be scrutinized by Wall Street.

It’s perhaps the biggest question swirling around the U.S. economy right now: Is inflation stuck at an elevated level — or will last year’s steady decline resume sometime soon?

On Wednesday, the government will issue the latest monthly inflation report, a set of figures that will be scrutinized by economists, Wall Street traders and Federal Reserve officials for any insight into that question. Analysts estimate that year-over-year inflation dipped from 3.5% in March to 3.4% in April, according to a survey by data provider FactSet. Measured from March to April, consumer prices are expected to have risen 0.4%, the same as the previous month.

Core inflation, which excludes volatile food and energy costs, may show that some relief is in sight: It is forecast to slow to 3.6%, which would be the lowest level in three years, from 3.8% in March. Month over month, core prices are believed to have risen 0.3%, down from the previous 0.4%. The Fed closely tracks core prices, which tend to provide a better read of where inflation is headed.

Whether inflation continues its decline will likely have a significant effect on this year’s presidential race. Republican critics of President Joe Biden have sought to pin the blame for high prices on the president and to use it to try to derail his re-election bid. While hiring remains robust and wage growth, on average, healthy, prices remain generally well above where they stood before the pandemic.

On Tuesday, Fed Chair Jerome Powell reiterated that he expects inflation to ultimately reach the central bank’s 2% target. But in remarks during a panel discussion in Amsterdam, Powell acknowledged that his confidence in that forecast has weakened after three straight months of elevated price readings. Inflation has fallen sharply from 9.1% in the summer of 2022 but is higher now than in June 2023, when it first touched 3%.

The Fed’s policymakers have raised their key interest rate to a 23-year high of 5.3% in an effort to quell rising prices. Powell underscored Tuesday that the Fed will keep its rate at that level for as long as needed to fully conquer inflation, a signal that rate cuts won’t begin as soon as many people had hoped.

Such comments by Powell have dashed hopes on Wall Street that the Fed would cut its rate three times this year, which as recently as March the central bank’s officials had projected they would do. Many economists now envision just one or two reductions this year, starting in September at the earliest.

Economists are divided over whether the high inflation figures in recent months reflect a re-acceleration in price growth or are merely echoes of pandemic-related price distortions. While auto insurance has soared 22% from a year ago, for example, that surge may reflect factors specific to the auto industry: New car prices jumped during the pandemic, and insurance companies are now seeking to offset the higher repair and replacement costs by raising premiums.

Stubbornly elevated apartment rents are another key factor behind persistent inflation. Rents soared during the pandemic as more Americans chose to live alone or sought more living space. Though rents for new leases are rising much more slowly, consistent with pre-pandemic patterns, the earlier increases are still elevating the government’s price data.

Indeed, rents and auto insurance account for most of the elevated inflation readings, said Alan Detmeister, an economist at UBS and former Fed staffer.

“Everything else is pretty much fine,” Detmeister said. “Inflation is still coming down, though it’s not coming down as quickly as we hoped.”

Other economists point to steady consumer spending on restaurant meals, travel and entertainment, categories where in some cases price increases have also been elevated, likely reflecting strong demand.

Powell, in his remarks Tuesday, also highlighted rising rents as a key factor keeping inflation high. He called that “a bit of a puzzle” because measures of new apartment leases show new rents barely increasing. Such weaker data has apparently yet to flow into the government’s measures, which cover all rents, including for tenants who renew their leases and are facing bigger increases. Powell said the government’s measures should eventually show rent growth easing.

The Fed chair also acknowledged that the economy “is different this time” because so many Americans refinanced their mortgages at very low rates before the Fed began raising borrowing costs in March 2022. Many large businesses also locked in low rates at that time.

“It may be,” he said, that the Fed’s rate policy “is hitting the economy not quite as strongly as it would have if those two things were not the case.”