Inflation moving 'a baby step' in the right direction? Here's what Wall Street economists expect from this week's big reports.

By Greg Robb

Smallest increase in core inflation since December expected; retail sales seen moderating

After a quiet week for U.S. economic indicators, this week will ramp up with Wednesday's release of the key April consumer price index.

For economists, attention is centered on the Federal Reserve and whether there are potential paths to interest-rate cuts before next winter.

The trend toward lower inflation was interrupted in the first quarter. That has raised fears of higher inflation and less easing from the Fed, said Sam Bullard, senior economist at Wells Fargo corporate and investment banking.

In light of the ugly data, Fed Chair Jerome Powell has laid out two potential paths to cuts. One is renewed confidence in low inflation; the other is unexpected weakening in labor markets

Economists will be watching the data with those two possible paths in mind.

Federal Reserve Chair Powell speaks

Tuesday, 10:00 a.m. Eastern

Powell will get a chance to update his views on the U.S. economy and interest rates. He will be on a panel with Klaas Knot, the head of the Dutch central bank, who's also a member of the governing council of the European Central Bank and chair of the Financial Stability Board.

Powell will speak before the CPI data is released. He is expected to repeat that it will take longer to gain sufficient confidence that inflation is coming down to cut rates.

April CPI

Wednesday, 8:30 a.m. Eastern

Wall Street economists expect headline CPI inflation will rise 0.4% in April, for the third straight month, according to survey of economists conducted by the Wall Street Journal. The index is seen moderating to a 3.4% annual rate in April, down from 3.5% in the prior month.

However, core inflation is expected tick a bit lower, rising 0.3%, the lowest rate since December. The core CPI is forecast to drop to a 3.6% annual rate in April, a three-year low.

"April could be a baby step in the right direction," sad Stephen Stanley, chief U.S. economist at Santander.

A cooler reading than consensus could reignite market calls for cuts but it wouldn't be enough to sway the Fed anytime soon, said Derek Holt, head of capital markets economics at Scotiabank.

"A warm/hot reading would probably offer further motivation for FOMC officials to take an ax to the cuts shown in the March dot plot when they publish a fresh one in a few weeks," he added.

Gasoline prices are expected to put pressure on the index in April. Medical-care costs could slow and be the start of a new long-term softening trend.

Despite the surprisingly hot inflation readings in the first quarter, economists still expect inflation to trend lower this year.

The most recent quarterly Survey of Professional Forecasters, released by the Philadelphia Fed, shows economists see headline inflation running at a 2.5% rate in the fourth quarter and core inflation running at a 2.7% annual rate.

April retail sales

Wednesday 8:30 a.m. Eastern

Economists surveyed by the Wall Street Journal expect retail sales to moderate in April after their surprisingly strong gain in the prior month.

Economists are penciling in a 0.5% gain after a 0.7% rise in March. Excluding autos, sales are expected to cool sharply to a 0.2% gain from the 1.1% rise in March.

Lou Crandall, chief economist of Wrightson ICAP, said that you have to average the two months of core readings together.

"The unexpectedly large increase in the initial estimates for March seemed out of step with some other consumer indicators and we would not be surprised if they were revised down somewhat in this report. If so, growth in April would probably not be as subdued as expected," he said.

Weekly jobless claims

Thursday, 8:30 a.m. Eastern

Economists surveyed by the Wall Street Journal expect jobless claims to fall 12,000 in the latest week ending May 11, retracing more than half of the surprising 22,000 gain to 231,000 in the prior week.

Economists say the gain was skewed by the rise in claims in New York because of a pop in claims from school support staff due to a late spring-break vacation week.

With the Fed watching the strength of the labor market, all eyes will be on the data.

-Greg Robb

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

05-12-24 1838ET

Copyright (c) 2024 Dow Jones & Company, Inc.