It's a Huge Week for Inflation Data. Here's What to Watch.

Several important readings of inflation are due this week, and they have significant potential to move financial markets. Consider, for instance, the May jobs report released last Friday morning (June 5), which was much stronger than expected. It spooked investors with new concerns that the Federal Reserve may have to hike rates sooner than previously believed. That makes these upcoming reports essential to watch.

First up is the Consumer Price Index (CPI), which will be released by the Bureau of Labor Statistics on Wednesday, June 10, at 8:30 a.m. ET. The headline CPI rose 3.8% year over year in April, which is far above the Fed's 2% target. The Cleveland Fed predicts that CPI for May will be even higher, at 4.18%. Core CPI, which excludes volatile food and energy costs, has been tamer, at 2.8% year over year in April, though still above the Fed's target.

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An upside surprise in the CPI will very likely put a dent in the current bull market rally. In fact, if the headline number is above the 4% threshold, as expected, I think that will cause stocks to drop. CPI hasn't exceeded 4% since May 2023, which was at the tail end of the 2022-2023 inflation spike.

Then, on Thursday morning, we'll get the Producer Price Index (PPI) for May. Often known as the wholesale inflation gauge, the PPI measures prices paid by manufacturers and wholesalers. It rose 1.4% in April, well above forecast, largely due to higher energy costs for producers. A hotter-than-expected reading here will also negatively impact the stock market.

Elevated gasoline prices are pushing inflation expectations higher

Finally, on Friday morning, the University of Michigan will release its Index of Consumer Sentiment, which measures consumer attitudes, including expectations about inflation. In May, consumers said they expect inflation to be 4.8% over the next year, which analysts attribute to high gas prices. Those are expected to settle down in the coming months, bringing inflation expectations down with them.

As with any inflation reading, the primary concern is that a hotter-than-expected reading will force the Fed to hike interest rates, which is rarely good news for stock prices, as higher rates increase interest costs for businesses and consumers and decrease corporate earnings. Right now, futures markets are pricing in a 72% chance that the Fed's target interest rate will be higher at the end of the year than it is today.

Inflation has been trending higher since the beginning of the war in the Middle East. Many economists think it won't be too damaging if the price spike is short-lived, but that depends entirely on the trajectory of the war and oil prices.

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