This week, traders are gearing up for significant market volatility centered around two major inflation reports: the Producer Price Index (PPI) on Tuesday and the Consumer Price Index (CPI) on Wednesday.

These reports are crucial indicators of inflationary trends in the U.S. economy and could heavily influence the Federal Reserve's monetary policy decisions in the coming months.

What to Expect from the April PPI Report

The PPI measures the average change over time in the selling prices received by domestic producers for their output. A higher-than-expected PPI suggests that inflationary pressures could be building up in the economy, which might prompt the Fed to consider keeping policy high for longer to cool down these pressures.

The PPI report will take on added significance this week, as markets are likely to view it as an indicator that could foreshadow unexpected developments in the subsequent day's CPI data.

Here's what economists are predicting for the April PPI report:

• The consensus among Wall Street economists is predicting a slight increase in the annual PPI inflation rate from 2.1% in March to 2.2% in April. If these predictions hold true, this would mark the third consecutive rise in the annual PPI rate and the highest level since April 2023.
• On a monthly basis, the PPI is expected to accelerate slightly, growing by 0.3% in April compared to 0.2% in March.
• The core PPI, which excludes volatile food and energy prices to provide a clearer measure of inflationary trends, is expected to remain stable at a 2.4% year-on-year rate.
• Monthly, the core PPI is anticipated to show a growth of 0.2%, consistent with the pace seen in March.

Commodity Prices May Drive A Surge In PPI

Recent trends in commodity prices are likely to influence the broader PPI surge. The most recent Institute for Supply Management (ISM) report highlighted that U.S. manufacturing producers are experiencing rising price pressures.

The subindex for Prices Paid climbed to 60.9% in April, up 5.1 percentage points from 55.8% in March, and marking the fourth consecutive month of rising raw material prices after a significant period of declines.

Commodities experienced significant volatility in April, largely due to geopolitical tensions in the Middle East disrupting the markets.

For instance, oil prices, as tracked by the United States Oil Fund (NYSE:USO), surged to their highest level in nearly two years on April 12 amid expectations of an imminent Iranian attack on Israel. However, crude later retreated and closed the month relatively unchanged.

Since the start of the year, oil prices are up 13%, while a broader commodity basket, as tracked by the Invesco DB Commodity Index Tracking Fund (NYSE:DBC) is 6% higher.

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