Critical CPI Inflation Reading Coming On Tuesday: What Investors Should Expect

Editor's note: this story has been updated to accurately reflect economist expectations for the November CPI readout. 

The SPDR S&P 500 ETF Trust SPY traded higher by 0.2% on Monday ahead of a critical consumer price index (CPI) inflation reading on Tuesday morning.

Economists are expecting the U.S. Labor Department to report 7.3% CPI inflation in November, in-line with 7.7% in October and a peak of 9.1% in June. Economists are also projecting that core CPI inflation, which excludes volatile energy and food prices, gained 6.1% in November versus 6.3% in the previous month.

Related Link: S&P 500 Loses Ground This Week Ahead Of Fed Interest Rate Decision: What Investors Need To Know

The latest inflation reading comes after the Federal Reserve issued its fourth 0.75% interest rate hike in the past five months in November in its ongoing battle to bring down the highest U.S. inflation in roughly 40 years. So far, the Fed has had limited success in cooling down an overheating U.S. economy.

Jobs And Wages: Earlier this month, the Labor Department reported the U.S. economy added 263,000 jobs in November, exceeding economist estimates of 200,000 positions. The Labor Department also reported wages were up 5.1% from a year ago and up 0.6% from October. U.S. GDP also grew 2.6% in the third quarter, ahead of the 2.3% growth economists were expecting.

In addition to the CPI reading, investors will be watching closely on Wednesday, when the Federal Reserve releases its latest interest rate decision and accompanying commentary. Economists are expecting the Fed to raise interest rates by another 0.5% this week.

Related Link: What 7.4% PPI Inflation Means For Investors: 'It Is Likely The Fed Will Move Ahead With Their Plans'

Voices From The Street: Cliff Hodge, Chief Investment Officer for Cornerstone Wealth, said Friday that he would be shocked if the CPI reading changes the Fed's mind ahead of this week's meeting.

"There is almost no scenario where they go 75, even on a hot CPI reading the day prior," Hodge said.

"We think the markets are too sanguine on rates after the first quarter and we expect [Fed Chair Jerome] Powell to take a more hawkish tone and for the dots to indicate higher rates for a longer period of time than what is currently being priced in by the futures markets; a 'hawkish' step-down so to say."

Bill Adams, Chief Economist for Comerica Bank, said Friday that CPI will continue to trend lower, but the Fed still has a lot of work to do.

"Comerica forecasts for CPI inflation to slow from 7.7% in October to around 3% in late 2023 as businesses lose pricing power and workers have fewer outside job opportunities and are less able to command wage increases. But 3% still isn’t 2%, the Fed’s target," Adams said.

Benzinga's Take: Any surprises in the CPI reading on Tuesday could trigger some extreme stock market volatility.

The bond market is currently pricing in a 74.7% chance of a 0.5% Fed interest rate hike on Wednesday, but that percentage could rise dramatically if the CPI reading comes in lower than expected.