Inflation data next week could mark the start of the end of upside surprises: MS

moved LYNXMPEI5E04H L — Inflation has come under added scrutiny following three months of hotter-than-expected data, but next week’s inflation print and others in the months ahead could mark the start of the end of upside surprises, giving the Federal Reserve the confidence it needs to begin cutting rates. 

“Core CPI inflation steps down in April with weaker services as the main driver,” Morgan Stanley said in a recent note that forecasts next week consumer price index report to show that the disinflation trend is back on track.

due May. 15, which is widely believed to be a better gauge of underlying inflation as it strips out volatile categories such as food and energy, is expected to have slowed to 0.29% for April, Morgan Stanley forecasts, from 0.36% the prior month, bringing the annual rate down to 3.6% from 3.8% a year earlier. 

April’s Core CPI will likely be driven lower by “weaker car insurance inflation, continued rents disinflation, and lower healthcare,” Morgan Stanley added.

Slower rent inflation would be one of key components to watch, Morgan Stanley adds, as “some market participants are expecting a meaningful step down as it happened in Mar-23.”

The rend of disInflation isn’t likely to only resume following three months of upside surprises, but show a step up in pace, giving the Fed the confidence to begin laying out the carpet for rate hikes. 

“Weaker monthly prints ahead with faster disinflation starting in 2H24 provides the Fed the confidence it needs that inflation is on a sustained path toward target,” Morgan Stanley said, as it maintained its forecast for three rate cuts this year and four next year.  

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Still, the chorus of recent remarks from Fed speakers suggest that some inside the Fed remain weary about cutting rates too soon. 

Dallas Federal Reserve President Lorie Logan said it was too early for the Fed to think about cutting rates and pointed to “uncertainties about how restrictive policy is and whether it’s sufficiently restrictive to keep us on this path” toward the 2% inflation target.

Others on the Fed voting committee, however, were more sanguine on rate cuts, with Atlanta Federal Reserve President backing rate cuts this year, but admitted that the timing remains uncertain.  

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