The US Consumer Price Index (CPI) is set to soar to near three-year highs, raising concerns among the Federal Reserve (Fed) about inflation. This surge in prices is largely attributed to the ongoing conflict between the US and Iran, which has driven oil prices to unprecedented levels. The April CPI data, set to be released on Tuesday, is expected to show a significant increase in consumer inflation, following March's sharp rise. The monthly CPI is forecast to rise 0.6%, with the annual reading climbing to 3.7%, its highest since September 2023. Core CPI, excluding volatile food and energy prices, is projected to come in at 0.4% and 2.7% on a monthly and yearly basis, respectively.
The conflict in the Middle East has had a profound impact on oil prices, with the West Texas Intermediate (WTI) barrel rising over 50% from February to April. Despite a slight correction in early May, oil prices remain 40% above pre-conflict levels. This surge in oil prices is expected to have a lasting effect on inflation, with economists predicting a 0.58% month-on-month rise in headline inflation, moderating from March's 0.9% but still relatively strong.
The core measure, however, is projected to accelerate to 0.39% MoM from 0.2%, indicating that underlying price pressures remain sticky even as energy-related effects fade. This suggests that the inflationary pressures are not solely due to the oil price shock but are also driven by other factors.
The US Federal Reserve (Fed) is closely monitoring these developments, as inflation has become a significant concern. The Fed's dual mandate of maintaining price stability and maximum employment is being tested by the persistent price pressures. With supply-chain issues and bottlenecks, the CPI is at multi-decade highs, and the Fed has already taken measures to tame inflation. It is expected to maintain an aggressive stance in the foreseeable future.
The April CPI data will be crucial in assessing the impact of high oil prices on inflation. A reading above the market expectation of 0.4% in the monthly core CPI could fuel concerns about entrenched high inflation. Conversely, a print below analysts' forecast could ease fears, but investors are unlikely to breathe a sigh of relief due to the unresolved US-Iran crisis and the ongoing risk to global energy supply chains.
The Minneapolis Fed President, Neel Kashkari, warns that a prolonged closure of the Strait of Hormuz could put inflation expectations at risk, requiring a strong policy response. Similarly, St. Louis Fed President Alberto Musalem highlights the need for policymakers to address underlying inflation, tariff shocks, and oil price shocks.
The US Consumer Price Index report could significantly affect the EUR/USD currency pair. Markets currently price in a 73% chance of the Fed leaving the policy rate unchanged at 3.5%-3.75% by the end of the year, with a 20% probability of a 25 basis points hike. A stronger-than-forecast core CPI print could lead to a rate hike later in the year, causing the US Dollar to strengthen.
However, a soft core CPI print could have the opposite effect on the USD's valuation. Unless there are significant developments indicating an end to the US-Iran conflict, any negative impact on the USD could be short-lived. Investors are on alert for potential delays to the first rate cut or an inability to ease in the second half of 2026 if energy prices rise sharply and persistently.
In conclusion, the US Consumer Price Index report is a critical indicator of inflationary trends and could significantly impact monetary policy decisions. The Fed's ability to manage inflation and maintain price stability is being tested, and the outcome of the April CPI data will have far-reaching implications for the US economy and global financial markets.
