Crude oil, AI chips, and rent "triple hit," tonight's US CPI may be "hot and spicy"

U.S. April CPI Expected to Continue March’s Hot Momentum, Driven by Soaring Energy Prices, Rising AI Hardware Costs, and Data “Technical Rebound,” the Data Released Tonight Could Once Again Shake the Market, Making the Fed’s Rate Cut Outlook Even Less Likely.

According to a Reuters survey, economists generally expect April CPI to increase by 0.6% month-over-month, with core CPI rising by 0.4%; in terms of year-over-year growth, overall CPI is expected to rise to 3.7%, and core CPI to 2.7%. If the data meets expectations, this will be the largest annual increase since September 2023.

Previously, March CPI rose by 3.3% year-over-year, hitting a new high since May 2024, when energy prices surged 10.9% month-over-month, with gasoline prices jumping 21.2%. And April’s inflation pressures are even more complex: on one hand, tensions in Iran pushed oil prices higher; on the other hand, the U.S. Bureau of Labor Statistics (BLS), due to last year’s government shutdown, lacked data, requiring a technical adjustment to rent prices this month. Bloomberg estimates this “technical adjustment” could contribute about 10 basis points to core CPI on its own.

Ahead of this data release, Fed officials have made it clear that controlling inflation remains their top priority. At the April Federal Open Market Committee (FOMC) meeting, three members—Harker, Kashkari, and Logan—voted against any language in the statement that would suggest easing bias. The statement also changed wording on inflation from “still at a high level” to “at a high level,” which markets interpret as a hawkish signal.

However, many analysts believe that, as long as the acceleration in core inflation mainly stems from rent’s technical adjustment rather than overheating fundamentals, markets may not reprice rate hike risks for now.

Rent “Technical Rebound”: The Biggest Variable in April Core CPI

April CPI faces a special one-time factor: a “compensatory jump” in housing costs.

Due to the federal government shutdown last fall lasting 43 days, the BLS was unable to collect some rent and owner’s equivalent rent (OER) samples in October, forcing it to use “forward estimation,” which artificially suppressed that month’s increase. Now, the affected six-month rolling sample set is being re-included in April, equivalent to filling in two months’ worth of price changes in a single statistical update.

Nick Timiraos, known as the “New Fed Communications Agency,” said on X that forecasting agencies expect April core CPI to rise partly due to this reverse technical bias. According to estimates compiled by The Wall Street Journal, the overall U.S. CPI for April is expected to increase by 0.56% month-over-month and 3.7% year-over-year; core CPI is expected to rise 0.36% month-over-month and 2.7% year-over-year, indicating persistent inflation above March levels.

Among forecasts, Morgan Stanley predicts the overall CPI will increase by 0.64% MoM, the highest among institutions; Wells Fargo’s forecast for core CPI is the most pessimistic, expecting a 0.50% MoM increase and 2.9% YoY, highlighting concerns about a slowdown in inflation decline.

Goldman Sachs expects OER category to rise 0.50% MoM in April, with rent increasing 0.44%. Barclays notes that this technical factor will add about 10 basis points to the monthly core CPI. Bloomberg further estimates that, excluding this “technical disturbance,” the actual core CPI increase in April would be only 0.24%. Despite upward pressure from airfare and AI-related products, the overall inflation pace is expected to remain relatively moderate.

Energy and AI Chips: Two Other Catalysts

Besides rent’s technical adjustment, energy and tech hardware costs are also pushing April inflation higher.

On energy, Goldman Sachs forecasts a 4.6% MoM increase in energy prices in April, with jet fuel costs rising, leading to a 3% increase in airfares. The core driver of this oil price increase is the U.S.-Iran military conflict: international oil prices briefly exceeded $100 per barrel after the conflict erupted in March; after a ceasefire agreement in early April, prices retreated but remained high.

Bloomberg data shows that retail gasoline prices rose 11.6% MoM in April, becoming the largest single factor driving overall CPI higher. Additionally, after food prices unexpectedly held steady in March, they are expected to accelerate in April, partly due to fertilizer shortages caused by disruptions in shipping through the Strait of Hormuz, raising agricultural production costs.

In terms of tech hardware, supply chain bottlenecks have been overlooked by the market as a price driver. Memory chips and CPUs, among other consumer electronics, are rising in price due to tight supply, and this trend is expected to continue throughout the year, with no significant decline in computer and accessories prices. This contrasts with the traditional view that “tariff-related goods are experiencing deflation.”

Although the U.S. Supreme Court overturned Trump’s comprehensive tariff policies in February, most economists believe the tariff transmission effects have largely ended, but AI-driven hardware demand is independently pushing up prices for certain core goods.

Core Inflation Shows Clear Internal Divergence

Despite April’s overall CPI being relatively high, core inflation shows significant internal divergence.

According to Bloomberg’s economic team, tariff-sensitive goods prices continue to decline, and prices for hotel, rental car, and entertainment services are also falling. This pattern resembles April 2025, after Trump’s tariff hikes, where deflation in optional services partly offset the price pressures from tariffed goods.

Meanwhile, prices in categories affected by supply chain bottlenecks remain sticky. Memory chips, CPUs, and other electronic components continue to be under pressure, with Goldman Sachs expecting prices for computers and accessories to rise further this year. In the auto sector, Goldman projects used car prices will fall 0.4% MoM, while new car prices will rise slightly by 0.1%, and auto insurance prices will increase by 0.4%.

Additionally, the healthcare insurance segment will soon see semi-annual data updates. Goldman expects these six periods to show about a 1.5% monthly decline, which will exert some downward pressure on core inflation but will not affect PCE inflation.

No Significant Repricing of Rate Hike Expectations, Room for Rate Cuts by Year-End

Given that April’s high inflation mainly stems from external shocks like the Iran conflict and rent’s technical adjustment, markets are unlikely to significantly reprice rate hike expectations. Bloomberg’s economists believe inflation expectations remain well-anchored, and there is still room for the Fed to cut rates by 50 basis points by the end of the year.

Goldman Sachs forecasts that core CPI will continue to increase by about 0.2% per month in the coming months, but if oil supply disruptions persist beyond expectations, inflation risks could rise. J.P. Morgan warns that if June data shows further acceleration in inflation, bond markets could face greater pressure, with yields rising.

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