Morgan Stanley warns of 'explosive' US CPI data this week

A hotter-than-expected inflation report this week could challenge the Federal Reserve's patient stance and roil markets.

Morgan Stanley is warning clients that this week’s US inflation data may come in hotter than expected, a development that could pressure the Federal Reserve to reconsider its outlook. The bank’s global head of macro strategy, Matt Hornbach, said Monday that the April Consumer Price Index (CPI) will present a "more explosive" picture than consensus.

"The market really needs to focus on the combined impact of all this week's inflation data on the Personal Consumption Expenditures (PCE) price index forecast," Hornbach said, referencing the Fed's preferred inflation gauge. "That's the number that really matters to the Fed."

Economists surveyed by Bloomberg predict April's overall CPI rose 0.6% from the prior month, a slowdown from March's 0.9% increase. However, core CPI, which strips out volatile food and energy, is expected to accelerate to 0.3% from 0.2%. The data will be followed by the Producer Price Index (PPI) on Wednesday and import prices on Thursday.

A significant upside surprise in the inflation reports would challenge market pricing for a steady Federal Reserve, potentially unwinding bets on future easing and lifting Treasury yields. The Fed’s next policy decision is scheduled for June 16-17, and this week's data will be a critical input for their deliberations.

Inflation Drivers: Oil and Rent

The expected strength in the April report is attributed to two main factors. First, rising gasoline and airline ticket prices, partly linked to the conflict in Iran. Second, the Bureau of Labor Statistics is set to implement a technical correction for data distortions from last year's government shutdown, which is expected to cause a one-time increase in rent inflation readings.

Will Costs Pass Through to Consumers?

Despite the headline risk, Hornbach expressed caution on whether higher corporate costs will fully translate to consumer prices. He noted that businesses are facing broad cost pressures, including rising energy expenses and investments related to artificial intelligence infrastructure. Citing the limited pass-through of Trump-era tariffs, he suggested the transmission to final prices might be weaker than many anticipate, a view that supports Morgan Stanley’s baseline forecast for the Fed to hold rates steady through 2026.

Markets are on edge ahead of the data. Bitcoin, often seen as a barometer for risk appetite, has stalled in a tight range between $80,000 and $82,400 as traders await clarity on the inflation trajectory. A hot report could strengthen the US dollar and create headwinds for risk assets, while a softer reading might reinvigorate assets that have benefited from looser financial conditions.

This article is for informational purposes only and does not constitute investment advice.