The highly anticipated consumer price index (CPI) report, set to be released on Wednesday morning, is expected to reveal modest increases of 0.3% for both the all-items measure and the core measure, which excludes volatile food and energy prices. This translates to year-over-year inflation rates of 3.4% and 3.7% respectively, both notably above the Federal Reserve's target of 2%.

These figures have sparked concerns among market participants about the state of inflation and its implications for Fed policy. Many are hoping that price increases will slow down enough to support gradual interest rate cuts later in the year. However, the CPI report is not expected to provide much reassurance.

Economists predict that the report will show little progress in the battle against inflation. According to Dan North, senior economist at Allianz Trade North America, the report is unlikely to demonstrate convincingly that inflation is moving towards the desired 2% target. He emphasized the need for sustained lower inflation rates over several months.

Inflation has come down significantly from its peak of over 9% in June 2022. The Federal Reserve responded by implementing 11 interest rate hikes, totaling 5.25 percentage points, between March 2022 and July 2023. However, progress has stalled in recent months, with headline CPI barely changing since the central bank ceased raising rates.

While the CPI is an important indicator, the Federal Reserve primarily relies on the Commerce Department's personal consumption expenditures index (PCE) when making policy decisions. The PCE index revealed headline inflation of 2.5% and core inflation of 2.8% in February.

The market's reaction to the CPI report has been jittery, with stocks experiencing volatility as investors try to make sense of the conflicting signals. Earlier this year, traders had anticipated multiple interest rate cuts beginning in March. However, the latest projections indicate that rate cuts may not occur until at least June, and even then, they may be limited to a maximum of three cuts.

The upcoming report will shed light on specific areas of interest, such as shelter costs, airfares, and vehicle prices. Changes in these sectors could indicate longer-term trends. Economists at Goldman Sachs anticipate declines in air travel-related expenses and vehicle sticker prices, alongside relatively smaller increases in shelter costs, which account for a significant portion of the CPI's weighting.

Additionally, concerns about rising rental costs have emerged, with a New York Fed survey revealing heightened expectations for rental expenses over the next year. This poses a challenge to policymakers who have previously cited declining housing costs as a key factor in their inflation outlook. The latest National Federation of Independent Business survey also showcased dwindling small business confidence, with inflation ranking as their top concern.

Gas prices will also play a crucial role in the CPI release, following a 3.8% increase in February. Despite remaining relatively stable over the past two years, gasoline prices have surged more than 70% since April 2020, when the brief recession caused by the COVID-19 pandemic ended. Similarly, food prices have risen by about 23% during the same period.

As the release of the CPI report approaches, market participants and policymakers alike eagerly await insights into the state of inflation. With modest increases expected in both the all-items measure and the core measure, it remains to be seen whether the report will provide evidence of a sustained downtrend in inflation, satisfying the Federal Reserve's criteria for potential interest rate cuts.

The consumer price index report is scheduled for release on Wednesday at 8:30 a.m. ET.