April Inflation Data Preview: Why Analysts Expect Price Pressures To Cool

Following three consecutive releases of inflation rates surpassing expectations, traders are anxiously awaiting the April Consumer Price Index (CPI) report, set to be released by the Bureau of Labor Statistics this Wednesday.

Analysts foresee a drop in both the overall Consumer Price Index (CPI) and its ‘core’ component, which excludes items like energy and food, in terms of annual inflation rates.

April CPI Preview: What Do Economists Expect

• The consensus among Wall Street economists anticipates the CPI inflation rate to ease from 3.5% in March to 3.4% in April, compared to the same month last year.
• On a monthly basis, the CPI index is predicted to decelerate from 0.4% to a 0.3% pace.
• The annual core CPI inflation rate is seen falling from 3.8% to 3.6% compared to a year ago. If expectations are matched, it will mark the lowest annual core inflation rate since April 2021.
• On a monthly basis, the core CPI index is also expected to decelerate from 0.4% to 0.3%.

Goldman Sachs' Take

Goldman Sachs has released its forecasts for the upcoming CPI report, aligning closely with broader consensus estimates. Economists Manuel Abecasis and Spencer Hill pointed out three component-level trends anticipated in the report.

They predict a 1.6% rise in car insurance prices as costs adjust, while health insurance costs are expected to stabilize with the BLS incorporating new premium data.

The analysis indicates that rent inflation has slowed to 0.37%, due to a smaller gap between prices for new leases and renewals. However, Owner’s Equivalent Rent (OER) inflation is expected to remain strong at 0.45%, driven by significant rent increases for new tenants and a greater difference in rents between new and existing tenants in single-family homes.

Looking ahead, Goldman Sachs forecasts that monthly core CPI inflation will hover between 0.25% and 0.30% in the coming months before decreasing to about 0.2% by the end of 2024.

The firm anticipates further disinflation driven by market adjustments in the auto, housing rental, and labor sectors, albeit with potential inflationary pressures persisting in healthcare, car insurance, and housing sectors.

They predict that the year-over-year core CPI will register at 3.5% and core Personal Consumption Expenditures (PCE) inflation at 2.7% by December 2024.

How Could Markets React?

The impact of CPI releases on financial markets over the past year has been notable.

Goldman Sachs found that on CPI release days, the S&P 500 index, as tracked by the SPDR S&P 500 ETF Trust SPY index typically sees a movement of 0.7% in absolute terms, compared to an average of 0.5% on other days.

Similarly, the 10-year US Treasury yield moves by an average of 11 basis points (bp) on CPI days, versus just 4 bp on non-release days.

Interest rate-sensitive sectors of the equity market, particularly non-profitable tech stocks, show marked reactions on CPI release days, regardless of whether the data surprises.

Goldman Sachs explains that one reason why unprofitable stocks are particularly sensitive to interest rate changes is their reliance on long-duration cash flows. Because these cash flows are anticipated far into the future, unprofitable stocks are disproportionately affected by increases in the discount rate – which is impacted by CPI releases – compared to more established stocks.

Over the last year, a specific basket of these stocks, which includes DraftKings Inc. DKNG and DoorDash Inc. DASH, typically experienced a 2.8% drop when core CPI exceeded expectations, a 1.7% decline when results met expectations, and a 4.8% increase when the core CPI was lower than anticipated.

Read now: Immigration Rebound Helps Solve US Inflation Puzzle: Goldman Sachs

Photo: Shutterstock