Preview of the April US consumer price index report

The United States Bureau of Labor Statistics releases the April CPI report at 8:30 am ET (1230 GMT). It's not the last look at inflation before the June 14 FOMC meeting but the May data won't be released until the morning of June 14, just a few hours before the Fed makes its decision.

Of course, the PCE report is the Fed's preferred measure of inflation and it's due on May 30. The problem with that is it lands just a few days before the Fed's communication blackout. That's fine if inflation is strong, but if it's weak, it will leave the Fed rushing to deliver a dovish message.

That's why this report is so important. If inflation is low and the retail sales report released at the same time is weak, the Fed will start to think about changing gears and waiting longer to hike. Earlier this week, KC Fed President Esther George already lamented soft auto sales as a worrisome signal on consumers.

Otherwise, the Fed has been undaunted and that's reflected in the market pricing in a more than 90% chance of a June hike.

The great debate

Another angle that doesn't get nearly enough attention right now is the great divide in central banks. There's the Fed camp and the ECB camp.

The Fed thinks that inflation is rising and will continue to rise. They think it's due to a tighter jobs market and that it's sustainable, if not accelerating.

The ECB, BOC and others think that inflation is a mirage. In early 2016 energy and commodity prices cratered in what was a major deflationary force. But as prices recovered, that reversed and it's created the illusion of inflation. Some of the core effects are due to spillovers from that.

In the months ahead we will find out who is right.

Month-over-month inflation fell to 2.4% from 2.7% in March. The consensus is that it will fall further to 2.3%. Of course, that could just be the usual ebb and flow.

What to watch

When the report is released, it won't be a single line to focus on. The market will try to absorb all the m/m, y/y numbers.

Here's what's expected:

  • CPI m/m +0.2%
  • CPI y/y +2.3%
  • CPI ex food and energy +0.2% m/m
  • CPI ex food and energy +2.0% y/y

In addition, wages are critical. The Fed believes that a tight labor market is currently feeding into higher wages. There are no expectations for average weekly and hourly earnings but the trend in those numbers will be crucial.

  • March avg weekly earnings -0.1% y/y
  • March avg hourly earnings +0.3% y/y

To be sure, those are poor numbers so the scope for a rise is significant.

Here is the trend in average weekly earnings:

So we can see that inflation and earnings are moving in opposite directions. The Fed will want to see them both moving in the same way if they're going to hike in June and beyond.

If the numbers disappoint, the US dollar will sink.