The Biden administration is in a damage control mode ahead of the latest inflation data, which is likely to show the U.S. cost of living soared in March, bolsteringh recession fears.
"We expect March [Consumer Pricer Index] headline inflation to be extraordinarily elevated due to [Russian President Vladimir] Putin's price hike," White House press secretary Jen Psaki told reporters on Monday. "We expect a large difference between the core and the headline inflation, reflecting the global disruptions in energy and food markets [caused by Russia's invasion of Ukraine]."
The data due on Tuesday at 12:30 UTC (8:30 a.m. ET) is forecast to reveal the CPI, which is defined as the change in the prices of a basket of goods and services typically purchased by specific groups of households, increased 8.3% year on year in March following February's 7% rise, according to data source FXStreet. The above-8% figure would be the first in at least four decades.
Core inflation, which strips out the volatile food and energy component, is expected to have risen 6.6% year on year versus 6.4% in February.
According to Psaki, the disparity between the two metrics would stem from an abnormal increase in gas prices last month. "At times, gas prices were more than $1 above pre-invasion levels, so that roughly 25% increase in gas prices will drive [Tuesday's] inflation reading," Psaki said.
The White House's warning of a big bump in the headline CPI due to the volatile food and energy component is perhaps aimed at calming market nerves ahead of the data. Risk assets, including bitcoin (BTC), have come under pressure in the lead-up to the CPI release on fears that an above-8% reading would strengthen the case for faster rate hikes and balance sheet runoff by the Federal Reserve.
Last week, Federal Reserve Governor Lael Brainard said that "bringing inflation down is of paramount importance." Brainard struck a hawkish tone, favoring interest rate increases and a rapid balance sheet runoff to bring U.S. monetary policy to a "more neutral position" later this year.
Psaki's comments perhaps indicate the White House expects the headline inflation to cool in the coming months, as the panic in the energy market has faded. Gas prices in the U.S. have pulled back to $4.11 per gallon from the record high of $4.33 per gallon hit on March 11, according to the American Automobile Association. West Texas Intermediate crude traded at $96 per barrel at press time, down 23% from the high of $123 seen a month ago, per charting platform TradingView. Energy prices had surged after Russia invaded Ukraine in late February.
It remains to be seen if investors take cognizance of the White House's view and remain calm in case of an above-8% CPI print. A big miss on expectations could restore risk-on sentiment in markets.
That said, the jury is out on the returns of animal spirits in asset markets, given the growing consensus that the era of low inflation and cheap liquidity may be behind us.
"We may be on the cusp of a new inflationary era," Agustín Carstens, general manager of the Bank for International Settlements, said in a speech earlier this month. "The forces behind high inflation could persist for some time. New pressures are emerging, not least from labor markets, as workers look to make up for inflation-induced reductions in real income."
“It seems clear that policy rates need to rise to levels that are more appropriate for the higher inflation environment. "Most likely, this will require real interest rates to rise above neutral levels for a time in order to moderate demand," Carstens added.
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