Why today's US inflation report could surprise to the upside, in one chart

  • The United States will release consumer price inflation (CPI) data for March later today.
  • RBC Capital Markets thinks an upside surprise could eventuate given strength in alternate data that has had a strong correlation to CPI in the past.
  • Financial markets have become increasingly sensitive to strong inflation and wage readings given the implications for US interest rate settings.

The United States will release consumer price inflation (CPI) data for March later today, bringing the focus in markets back to the outlook for monetary policy settings from the US Federal Reserve after being dominated by geopolitics for days.

Tom Porcelli, Chief US Economist at RBC Capital Markets, thinks an upside surprise could be on the way, pointing to a component in Tuesday’s US producer price inflation (PPI) report that is often influential on movements in headline CPI.

“Headline and core PPI came in firmer than market expectations with both measures advancing 0.3% on the month,” Porcelli says. “But what really matters for tomorrow’s CPI is the ‘finished consumer goods component and that rose 0.2% on the month.”

Porcelli says this underlying component has a historically strong correlation with the monthly movements in CPI, meaning today’s inflation report could come in hotter-than-expected.

Source: RBC Capital Markets

“[The] bottom line is that this ‘models’ to a 0.15% monthly increase on headline CPI,” he says.

“With the market expecting a flat reading, there is definitely some upside risk here.”

Should Porcelli’s model be on the money, it could see annual growth in headline CPI jump to as high as 2.6% depending on rounding, significantly higher than the 2.2% pace seen in February and market expectations for a smaller increase to 2.4%.

Markets also expect core CPI to accelerate with the median economist forecast looking for an annual increase of 2.1%, up from 1.8% in the 12 months to February.

While the core reading is not the Federal Reserve’s preferred inflation measure, choosing instead to focus on core personal consumption expenditure (PCE), an in-line result of 2.1% would be above the bank’s 2% annual target, something that has not been seen since early 2017.

Financial markets have become increasingly sensitive to US wage and inflation reports in recent months, contributing to a lift in stock market volatility as higher readings fanned concerns that the Fed may hike interest rates faster and higher than many previously thought.

Another strong inflation reading today, therefore, carries the potential to lead to a similar outcome for markets.

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