By Stephen Culp

NEW YORK, (Reuters) – Market participants are anxiously awaiting confirmation from Friday that the decades-high inflation reached its peak in March and is now on its way down.

The Labor Department’s Consumer Price index, which measures the price of urban items to consumers, will accelerate to 0.7%, from 0.3%. However, once it removes volatile foods and energy products, the index is projected to slow to 0.1% to 0.5%.

The consensus sees the headline CPI staying steady at an alarming 8.3%. However, there is a core CPI print reading of 5.9%. This would indicate a welcome decline by 0.3 percentage points.

Peter Tuz of Chase Investment Counsel, Charlottesville, Virginia, stated that “you’re going see a high headline figure, mainly because fuel and food.” But the core number will likely mitigate some.”

“It’s a trend in the right direction,” Tuz added.

Lower core would indicate that April’s inflation pullback is not accidental. First, the employment report on Friday showed a wage growth component.

Graphic: Inflation, https://graphics.reuters.com/USA-STOCKS/zgpomeomjpd/inflation.png

Prices have soared well above the 2% annual target of the U.S. Federal Reserve due to a combination of resurgent demand and a weak global supply chain.

In recent months the central bank has taken action, increasing the Fed funds target interest rate by 75 basis point in an effort to cool the economy down and control inflation.

At the end of Federal Open Market Committee (FOMC), June and July Monetary Policy Meetings, two more 50-basis point interest rate increases are anticipated.

Although some economists are concerned that an abrupt tightening might cause the economy to plunge into recession, there is ample evidence to suggest the Fed could have some room for dovishness this fall.

Graphic: Fed funds target rate, https://graphics.reuters.com/USA-STOCKS/zjvqkgrjrvx/fedfundstgtrate.png

Even though core CPI agrees with consensus on price growth, it is still stubbornly high and well ahead of wage inflation. This situation can only be temporary and will dampen consumer spending.

Graphic: CPI and wage growth, https://graphics.reuters.com/USA-STOCKS/dwpkrnxdwvm/cpiwages.png

Consumers, which contribute 70% to the U.S. economy’s growth, spend less on savings, dip into savings, and make more plastic purchases, even though their sentiment and inflation expectations are high.

Tuz explained that many people struggle to pay for food and energy. “It’s a painful environment out there.”

“Savings are down, credit usage is up”

Graphic: Consumer savings, expectations and credit, https://graphics.reuters.com/USA-STOCKS/klvykoagyvg/consumersavingscredit.png

Graphic: UMich inflation expectations, https://graphics.reuters.com/USA-STOCKS/egvbkwrygpq/cpiexpectations.png

Following Friday’s CPI Report, the market participants will focus their attention on next week’s Producer Prices Data and Wednesday’s statement by the Fed. These are due at the end of the Fed’s two day monetary meeting. At which point the central bank can be seen making the second of its expected three 50-basis points interest rate rises.

CPI is the current focus.

Tuz said that markets may be okay with it if the base and core numbers are shockingly high.

“We’ll be able to tell tomorrow at the time.”