Past-Peak Inflation Might Be Misleading as Price Pressures Continue to Mount

After months of rising inflation, a fresh U.S. government report this week may finally show a deceleration in price increases. But don't be fooled: It won't necessarily mean that upward pressures are easing.

The U.S. Labor Department is scheduled to publish on Wednesday its Consumer Price Index (CPI) report for April.

Bitcoin (BTC) traders will be watching because the largest cryptocurrency by market cap has been swayed heavily by macroeconomic indicators recently. Specifically, the prospect of aggressive monetary tightening by the U.S. Federal Reserve – in response to the highest inflation rate in four decades – helped send bitcoin this week to a 10-month low of around $30,000.

Forecasters expect headline inflation to have climbed 8.1% year over year in April, according to data from FactSet, which would be lower than the 8.5% reported for March.

But comparing the year-over-year change could be misleading because the CPI saw a big jump in April 2021. That data point could skew the interpretations of this week's report.

“There is the problem of year-over-year comparisons since last spring saw the big jump in inflation,” said John E. Silvia, former chief economist for Wells Fargo (WFC) and founder of Dynamic Economic Strategy.

Eric Winograd, senior vice president and director of developed-market economic research at AllianceBernstein, agrees. “The year-on year-numbers are going to come down, almost no matter what. That isn't particularly meaningful, because it doesn't tell us what's really going on with prices right now. It tells us what went on with prices a year ago,” he said.

Energy prices – in particular gasoline, which accounted for over half of the all-items monthly increase in March – have been more stable in April, one reason why economists expect headline inflation to have slowed.

Core inflation

Instead, traders will be more closely watching "core" inflation, which is expected to have increased 0.4% from March, signaling higher inflation on a month-to-month basis. Core inflation excludes any impact from food and energy prices, which tend to experience bigger swings than other goods and services.

“It's really the core inflation numbers that matter,” Winograd said. “There's a widespread perception that supply and demand are out of balance in the economy, and that's likely to keep core inflation relatively elevated.”

“Issues with rents may be showing up, and so the core CPI may not have peaked,” Silvia said.

According to Federal Reserve Chair Jerome Powell, the main drivers for inflation right now are supply chain disruptions and consumer demand, but there is a new concern that wage pressure might start to appear. Last week, the Labor Department reported that the U.S. job market in April remained tight, which tends to drive wages up.

The U.S. employment cost index also showed that employment costs jumped by the most in two decades last month.

As for how Wednesday’s report will influence Federal Reserve officials, their minds might already be made up. Powell said last week that a 75 basis point (0.75 percentage point) rate hike is not being considered and that "50 basis points should be on the table for the next couple meetings.”

“It takes something very dramatically different for them to change that path,” Winograd said.