Tuesday morning’s March Consumer Price Index (CPI) report from the US Bureau of Labor Statistics will have the market’s undivided attention.

Despite Fed Chairman Jerome Powell’s oft-repeated assurance that inflation doesn’t worry the Fed, markets wonder how long the Treasury can create debt and the Fed can monetize it before inflation returns with a vengeance. 

The consensus forecast expects that CPI excluding food and energy (so-called core inflation) will have risen by just 1.5% year-on-year, a bit more than February’s 1.3%.

Some smart money is betting that the number will be well above consensus, for example, the economists at Union Bank of Switzerland’s Evidence Lab, who look at a mass of high-frequency observations in order to anticipate Federal data releases.

Part of the problem is that the numbers themselves are miscalculated by a gigantic margin. For example, the Case-Shiller Index of US home prices rose 11.5% year-on-year as of the end of January (dotted blue line in the chart), while the “Shelter” sub-index of the US CPI rose by just 1.5% year-on-year.

If it costs 11.5% more to buy the average US house, how is it possible for government statisticians not to notice this?

There are any number of special factors, such as the fact that federal law prohibits evictions, so that tens of millions of Americans either are not paying rent, or are not paying more rent – since so many renters are frozen in place.

Part of the problem is the mysterious calculation of “owner’s Eequivalent rent,” or the rent you would pay to yourself to live in your own house.

There are lot of other dodgy numbers, including falling inflation for new vehicles. This is the price you don’t pay for a car you can’t buy, because the semiconductor shortage has chopped US car and light truck production to under 9 million in February from 12 million in July.

For some reason new car prices rose only 1.2% year-on-year as of February, while used car prices rose 9% – and the price of used cars sold at auction rose by nearly 20%, according to J.D. Powers.

Inflation is coming – or, more precisely, it’s here, but the Federal Reserve pretends that it isn’t.

At some point the Bureau of Labor Statistics data have to catch up with real world prices, so traders will watch carefully to see when this happens. At that point the Federal Reserve won’t be able to justify it’s ultra-loose monetary policy.

That doesn’t mean the Fed will tighten. If it does, stock and bond prices both will go down, and it will be all the harder to finance a federal deficit of 15% of GDP (assuming that the Biden Administration is allowed to spend more money on what it quaintly calls infrastructure during the present fiscal year).

The Fed has painted itself into a corner, and its best course of action is to declare – in contravention of the facts – “That’s my story and I’m sticking to it.” The only question is when the market ceases to believe in the frame. Tuesday’s CPI number may give us some clues.