An Inflation Test Looms Over the Economy and the Election

Jay Powell, the Fed chair, and investors will be closely watching Wednesday’s Consumer Price Index report for signs on whether inflation is moving closer to its 2 percent target.Credit…Saul Loeb/Agence France-Presse — Getty Images

Another inflation surprise?

Wall Street is increasingly divided over whether the Fed will cut interest rates by Election Day. New inflation data out this week will go a long way toward settling that question, as polls show that President Biden is struggling to convince voters that he’s done a good job on the economy.

It’s a big week for economic data with mixed signals on inflation. A first-quarter uptick in inflation has forced the Fed to keep borrowing costs at a 23-year high. Economists see a slight improvement, forecasting that April’s Consumer Price Index report on Wednesday will show that inflation moderated slightly last month.

Such good news would follow a tamer than expected May 3 jobs report, which saw wage growth easing. (Economists will also be watching Tuesday’s Producer Price Index and retail sales data on Wednesday.)

What will it take for the Fed to start cutting rates? The central bank “will need to see at least three benign core inflation prints, perhaps even four, before easing policy,” Sarah House, senior economist at Wells Fargo, wrote in a research note last week. That makes the C.P.I. data crucial, she added, as “time is running out on the clock for even a late summer rate cut.”

Here’s what economists will be zeroing in on:

• Core C.P.I., which strips out volatile food and fuel prices, is expected to rise by 0.3 percent on a monthly basis — an improvement from the 0.4 percent monthly jumps seen in January, February and March.

• On an annual basis, core C.P.I. is seen rising by 3.6 percent — an improvement on March’s 3.8 percent, but still well above the Fed’s 2 percent target.

• So-called shelter inflation, which includes rents and housing costs, is still running hot. Any sign of easing is likely to influence the Fed’s outlook on interest rates.

Consumers and companies alike are worried about inflation. On Friday, the closely watched University of Michigan consumer sentiment survey showed that households are increasingly worried about the cost of living and a slowing jobs market. That comes in an earning season when several dozen C.E.O.s have told analysts that their less affluent customers are cutting back because of high prices. That raises the question: Are these signs that consumer spending is under pressure helping to bring down inflation?

The futures market on Monday was penciling in as many as two rate cuts this year, with the first coming in September. But those odds have fallen steadily since the start of the year — and some rate hawks even see no cuts this year — as inflation has rebounded.