The Consumer Price Index (CPI) is expected to have slightly eased in March, but not enough to meet the Federal Reserve’s price stability mandate.

The Inflation data set to be released on Wednesday will help determine whether the central bank will raise or pause interest rates in May – a major discussion point on Wall Street.

Economists predict that March’s Headline CPI will increase by 0.2% from February, down from the 0.4% pace recorded in the previous month. Year-over-year, headline inflation is expected to rise by 5.2% versus 6.0% in February.

Excluding the volatile food and energy sectors, core CPI is expected to advance 0.4% M/M, compared to February’s reading of 0.5%, and 5.6% vs. 5.5%.

Although the headline print would mark the slowest annual increase since May 2021, it would still be more than double the Fed’s 2% inflation objective.

In the words of Greg McBride, chief financial analyst at Bankrate, the monthly increases in consumer price inflation for January and February do not “inspire confidence that 2% is just around the corner.”

This gap means that another 25-basis-point rate hike will probably take hold at the Federal Open Market Committee’s May 2-3 meeting, which fed funds futures are largely pricing in, bringing the policy rate target range to 5.0%-5.25%. Click To Tweet

“To feel good about where inflation is headed, we need to see more than just moderation in the rate of both headline and core inflation,” added McBride. “We also need to see moderation in price pressures across a wide range of categories that are staples of the household budget: shelter, food, electricity, motor vehicle insurance, apparel, and household furnishings and operations.”

For the first time, Y/Y core CPI is expected to be hotter than the headline number, which could change investors’ perception of inflation.

According to Michael Kramer, investing group leader of ‘Reading The Markets,’ this shift could lead investors to focus more on the sticky core CPI metric and less on the volatile headline CPI.

Mott Capital’s Kramer believes that “an inline or hotter-than-expected inflation print on either headline or core would lock in a Fed rate hike in May, potentially opening a path to further rate hikes later this summer.”

Monetary policy takes time to impact the real economy, which is why money markets fear that the Fed might hike the economy into recession rather than achieving a soft landing.

Kramer also noted that the “already overvalued stock market” is not pricing in the potential for a rate shock stemming from a stronger than feared CPI report, based on levels of implied volatility.

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