Market Anticipates Significant Movement Ahead of Tomorrow's CPI Release

Market Anticipates Significant Movement Ahead of Tomorrow's CPI Release 

CPI Release May Spark Market Movement

While not anticipated to have the same impact as the surprising CPI releases of 2022 and early 2023, inflation report could prompt significant market reactions. Markets are currently pricing in a 0.95% move following the report, compared to 0.7% last month, particularly if the data diverges significantly from expectations.

Expectations for February's headline CPI suggest a 0.4% month-over-month increase, following January's hotter-than-expected 0.3% rise. Core CPI is projected to rise by 0.3% month-over-month, down from January's 0.4% increase. Forecasts show little variance, with estimates ranging from 0.2% to 0.4% for core CPI.

These monthly increases are likely to push headline CPI to 3.1%, slightly above the year-to-date low of 3.0% reached in June. Core CPI is expected to dip to 3.7%, the lowest since April 2021. However, previous forecasts have been inaccurate, as January's expected 3.7% print turned out to be 3.9%.

While there was a perception in late 2023 that inflation was nearing the Fed's 2% target sooner than expected, recent data suggests otherwise. Despite some concerns over a potential new cycle of rising prices, inflation has stalled. This challenges the notion that the transition from 3% to 2% inflation will be straightforward.

Goldman Sachs predicts a 0.32% increase in February core CPI, slightly higher than the consensus forecast of 0.3%. This would result in a year-over-year rate of 3.71%. The bank also anticipates a 0.44% increase in headline CPI, driven by higher energy and food prices.

Goldman Sachs highlights several trends within the report. These include an expected slowdown in medical care and personal care services, a decline in used and new car prices, and a moderation in shelter inflation.

Looking ahead, Goldman expects monthly core CPI inflation to decrease to 0.15-0.20% as the effect of early-year price increases fades. They forecast year-over-year core CPI inflation of 2.9% and core PCE inflation of 2.2% by December 2024.

Market reactions to the CPI report vary depending on the data's outcome. While a low CPI number may reassure investors, a high print could lead to concerns about inflation. Analysts predict different scenarios based on various CPI ranges, with potential impacts on equity markets and Fed policy expectations.