What to Expect From Tuesday's Highly Anticipated Inflation Report

• Forecasters expect Tuesday's government report on changes in consumer prices in February to show a notable downtick in 'core' inflation, which is the cost of things other than food and gas.
• If the report meets expectations, it may leave the Federal Reserve on track to begin rolling back its campaign of anti-inflation interest rate hikes in June.
• While 'core' inflation leaves out some of the most important items in household budgets, it provides a better measure of the trajectory of prices long term because food and gas prices often change in response to events that have nothing to do with broader inflation trends.

January’s worrisome uptick in inflation was probably just a fluke—if forecasters are correct.

Tuesday’s report on the Consumer Price Index is expected to show that prices rose 3.1% over the previous 12 months in February, the same annual rate as in January, while “core” inflation, which excludes volatile prices for food and energy, is predicted to have declined to 3.7% over the year, down from 3.9% in January, according to a survey of economists by Dow Jones Newswires and the Wall Street Journal.

Prices are expected to have risen 0.4% in February over the month, an acceleration from the 0.3% monthly increase in January. That would be largely due to rising gas prices, economists said. 

While that’s not great news for household budgets, core inflation—which economists believe provides a better reading of the trajectory of inflation—is expected to have moved in the opposite direction, down to a 0.3% monthly rate in February from 0.4% in January. Should the report match expectations, it would be a sign that January’s surprising burst of inflation wasn’t the beginning of a trend.

Tuesday’s report—especially what happens with core inflation—will have implications for the Federal Reserve’s key interest rate. If inflation falls as expected, economists said it could encourage the Fed to cut the fed funds rate in June as markets currently are anticipating. Investors see a nearly 60% chance the first cut will come at that time, according to the CME Group’s Fedwatch Tool, which forecasts interest rate movements based on fed funds futures trading data.

“Overall, a report in line with our expectations would keep the Fed on track to begin cutting rates at its June meeting,” Stephen Juneau, U.S. economist at Bank of America Securities, wrote in a research note. “Alternatively, if core CPI prints above our expectations, it would increase the likelihood of a later start to the cutting cycle.”

Inflation measures have attracted extra attention lately because of how they influence Fed policy. Starting in March 2022, the Fed raised its influential interest rate to a more than two-decade-high and has held it there to quash the inflation that flared up as pandemic restrictions eased in late 2021. With inflation having fallen closer to the Fed’s goal of a 2% annual rate from a peak of 9.1% in June 2022, Fed officials are now mulling when to lower the influential interest rate.

High interest rates put a drag on price increases as well as economic growth by putting upward pressure on borrowing costs for all kinds of loans, including mortgages and credit cards. The Fed’s balancing act—which has been successful so far—is to cool inflation down without causing a recession and mass layoffs. 

If inflation is rearing its head again, that could discourage the Fed from cutting rates, which would mean higher borrowing costs for longer and more risk of a recession. However, some economists, including Juneau, said the January jump in inflation was likely a quirk related to the way the Bureau of Labor Statistics measures housing costs rather than a shift in the overall inflation trend and is unlikely to be repeated. 

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