U.S. April CPI Data Released Today, Morgan Stanley Warns 'Data is Explosive'

This week, the Federal Reserve's policy path will face intensive data tests.

CPI (Tuesday), PPI (Wednesday), and import prices (Thursday) will be announced successively this week, constituting what the market calls "inflation week." U.S. Treasury yields have been on the rise recently, already reflecting traders' concerns about the inflation outlook.

The next Federal Reserve policy meeting is scheduled for June 16th and 17th, when policymakers will face the comprehensive test from these dense data.

CPI expectations are on the warmer side, with oil prices and rents being the main causes

Matt Hornbach, Head of Global Macro Strategy at Morgan Stanley, warned on Monday that the April CPI release on Tuesday will present "more explosive" data.

Bloomberg Economics also expects that both the overall and core CPI readings for April will be on the warmer side, driven by two ends: the Iran war pushing up gasoline and air ticket prices; the U.S. Bureau of Labor Statistics will revise the data distortion caused by the government shutdown last October, leading to a one-time jump in rent inflation.

Bloomberg surveys economists who expect that the overall CPI for April will rise by 0.6% month-on-month, lower than the 0.9% in March; the core CPI is expected to rise from 0.2% to 0.3% month-on-month.

PCE is the number the Federal Reserve truly cares about

Hornbach emphasized that the market cannot just focus on the single data point of CPI. The comprehensive impact of the three indicators converging this week on PCE forecasts is the true focus of attention - PCE is the Federal Reserve's preferred measure of inflation.

"CPI, PPI, and import prices each contribute to the prediction of PCE in different ways, and that is the number that truly matters to the Federal Reserve."

Morgan Stanley currently maintains the base forecast for the Federal Reserve to remain on hold this year.

Cost transmission may be lower than expected, and businesses may not pass on pressure to consumers

Although the inflation data are expected to be on the warmer side, Hornbach is cautious about whether costs can be effectively transmitted to the consumer end. He uses Trump's "Tax Liberation Day" tariffs as an example, pointing out that many economists at the time expected businesses to pass on tariff costs to consumers, but the actual amount transmitted was far less than expected.

"It is still unclear whether businesses are passing on additional costs to consumers, and the transmission amount may be lower than previously expected," he said. Current businesses also face broader cost pressures, including rising energy costs and increased investment in AI infrastructure, which together squeeze the space for businesses to pass on costs.

The tension between hot data and weak transmission may be the main narrative to which the market should pay attention this week.