Sink Or Swim? Why This Week's Inflation Report Is Crucial For Markets

After wild market volatility amid escalating tariff tensions, Wall Street is heading into a potentially game-changing moment: the March inflation report, due Thursday morning.With investors jittery over the economic fallout from rising trade barriers, the Consumer Price Index data could either bolster hopes for rate cuts or confirm fears that the Federal Reserve remains cornered by sticky inflation, further disappointing investor sentiment.Fed Chair Jerome Powell made it clear last week that there is “no rush” for rate cuts. He cited heightened uncertainty around growth and inflation, particularly in light of the White House's aggressive tariff stance.Yet, a meaningful cooling in consumer prices might open the door to a more dovish posture as policymakers would shift their focus to the likely economic damage from tariffs.For a market gripped by one of the fastest selloffs in modern history, a soft inflation print could be a much-needed glimmer of hope in an otherwise stormy environment.In the lead-up to the inflation report, the S&P 500 — tracked by the SPDR S&P 500 ETF Trust SPY — has dropped more than 10% since Donald Trump's tariff announcement on April 2 and now sits 18% below its February peak, flirting with bear market territory.Money markets are pricing in a 43% probability that the Federal Reserve will cut interest rates by 25 basis points at its May meeting. A softer-than-expected inflation print could significantly boost those odds, offering potential relief to jittery markets.March Inflation Preview: What Do Economists Predict?The median estimate from economists calls for a 2.6% year-over-year rise in headline CPI for March 2025, easing from February's 2.8% and marking the lowest inflation print since October 2024. Prices are expected to tick up just 0.1% monthly, down from 0.2% the previous month—the slowest pace since July 2023.Core CPI, which excludes the more volatile food and energy components, is projected to decelerate modestly to 3.0% year-over-year, down from 3.1% in February. Yet, the monthly core reading is expected to tick higher to 0.3%, up from the prior month's 0.2% pace.Goldman Sachs economist Jessica Rindels projects the report to come in broadly in line with consensus. She highlights three underlying trends likely to shape the data. First, used vehicle prices are expected to decline by around 0.5%, driven by softness in wholesale auction prices. At the same time, new car prices may see a marginal rise of 0.1% as dealership incentives dwindle. The most notable increase is forecast in car insurance, where premiums are rising sharply, potentially pushing the category up by 1.0% in March.“Going forward, we expect a boost to monthly inflation from the escalation in tariff policy. Aside from tariff effects, we expect underlying trend inflation to fall further this year, reflecting shrinking contributions from the auto, housing rental, and labor markets that is partially offset by catch-up inflation in healthcare,” Rindels said.Core inflation, which excludes energy and food items, is expected to ease from 3.1% to 3% annually in March. The monthly reading is seen accelerating from 0.2% to 0.3%.The ‘Fed Put’ Is Off The Table, Wall Street Veteran Analyst WarnsVeteran strategist Ed Yardeni takes a more cautionary tone, warning that the CPI and Friday's Producer Price Index (PPI) report may reveal faster gains in goods prices, driven by import taxes and supply chain friction."The Fed Put is likely on hold this year," Yardeni said, referring to the long-standing assumption that the Fed would step in to support markets during downturns. "Even if tariffs and uncertainty cause a real GDP slowdown, the Fed may be reluctant to cut."Yardeni indicated that higher headline inflation could force the central bank to keep rates elevated longer than the market expects, compounding risks for equity markets already reeling from what he calls the "Trump Tariff Turmoil" (TTT).Read now: Wall Street’s ‘American Exceptionalism’ Trade Falters As Dollar, Stocks, Bonds All Slide Photo: Shutterstock