Newsquawk Preview: US CPI due Friday at 13:30BST/08:30EDT

SUMMARY: Headline CPI is expected to reaccelerate in March, driven largely by the energy shock from the Middle East conflict and the related rise in energy and commodity prices. Headline CPI is seen rising 0.9% M/M (prev. 0.3%), with the annual rate rising to 3.3% from 2.4%. Core inflation is seen steadier at about 0.3% M/M and 2.7% Y/Y. Events in the Middle East could lift inflation through energy costs and the impact from supply chains while weighing on growth. Nonetheless, a brief shock may be looked through, but any prolonged disruption would likely delay the timing of Fed rate cuts. Officials say inflation remains too high, with upside risks if oil shocks spill into core prices and expectations, although expectations are still seen as well anchored. Most view the Middle East war as a temporary, one-off price impact and believe the Fed is well placed to wait and see. Across most of the Committee, the inflation side of the mandate remains the main concern, with Powell saying in his post-FOMC press conference that if inflation progress does not resume, cuts will not follow. More recently, Goolsbee, a 2027 voter, and Hammack, a 2026 voter, said in a radio interview that they see inflation as a bigger problem than employment. Given the uncertainty from the Iran war, money market pricing has turned more hawkish, with just 5bps of cuts priced in for this year. On the sell side, Wells Fargo now expects the Fed to keep rates unchanged in 2026, having previously seen two cuts, while Citi sees cuts starting in September, rather than June.

EXPECTATIONS: Consensus expects headline CPI to rise 0.9% M/M in March, versus 0.3% previously, with the annual rate seen jumping to 3.3% Y/Y from 2.4% because of the Iran-related energy shock. Core CPI is seen rising 0.3% M/M, versus 0.2% previously, with the Y/Y rate at 2.7% from 2.5%. Within energy, Credit Agricole expects motor fuels to rise by about 24-25% M/M NSA, lifting overall energy CPI from 0.5% to about 12% Y/Y. The Cleveland Fed nowcast points to headline CPI of about 3.25% Y/Y in March, versus the 2.4% in February, which was in line with the actual.

FED POLICY: The Federal Reserve remains in wait-and-see mode, particularly given the ongoing Middle East war. Aside from uber-dove Miran, the overwhelming consensus within the FOMC is to hold rates at current levels because of Iran-related uncertainty. However, Governor Waller said that, absent the war, he would have voted to cut rates after the February labour market report. The latest Minutes broadly validated the hawkish hold but showed a more explicit debate over two-sided risks either side of the unchanged decision. After the most recent FOMC meeting, when rates were held as expected, Chair Powell's press conference struck a hawkish tone, with his main concern clearly inflation persistence rather than growth weakness. He repeatedly stressed the need for further progress in goods disinflation, flagged frustration over sticky non-housing services, and made clear that if inflation progress does not resume, cuts will not follow. He also highlighted fresh upside inflation risks from tariffs, which he expects to materialise by mid-year, as well as from oil and the Middle East. The key point was that energy shocks can be looked through only if inflation expectations remain anchored, and even then, not lightly. Powell said several officials had noted a rise in short-term inflation expectations, while long-term expectations remained "solid", adding that the Fed is strongly committed to keeping expectations anchored around target. Anchoring expectations is paramount for the Fed, with Waller noting that markets have not shown any unanchoring. In the latest NY Fed Survey of Consumer Expectations, 1yr inflation rose to 3.4% from 3.0% in February, 3yr edged up to 3.1% from 3.0%, while 5yr was unchanged at 3%. Market based expectations remain little changed; The 5-year breakeven inflation rate is at 2.56% vs 2.40% pre-war, and the 10-year at 2.33% vs 2.25% pre-war.

IRAN: The Middle East conflict has been a major focus, particularly on the energy front given the closure of the Strait of Hormuz, which affects the inflation outlook through energy prices. While a two-week ceasefire was agreed on Tuesday, it remains unclear how long it will hold and what the outcome will be when it ends. Although this offers some relief and oil prices fell in response, it will not affect March CPI, but attention will turn to whether it dampens inflation further ahead. Fed commentary has frequently focused on the Iranian war. After the Fed press conference, Powell said it is too early to gauge the size of the energy shock, reiterating that policy is well positioned to wait and see. NY Fed President Williams expects the impact of Iran to feed directly into headline inflation through energy, with inflation this year at about 2.75%. He remains focused on underlying inflation, which he expects to ease later this year, noting the core inflation story has not materially changed. Dallas Fed research suggests a Strait of Hormuz closure could sharply raise inflation, but finds little evidence that higher petrol prices feed through to core inflation or that long-run expectations become unanchored.