CPI Cools Faster than Estimates; Time to Cut Rates

Lede

• Disinflation has returned.
• Core CPI YoY is the lowest it has been since April 2021.
• Core CPI MoM is the lowest since August 2021.

The Fed will deliver a decision today, we will receive a new dot plot (Fed projections for inflation, GDP, and the labor market) and Chairman Powell will hold a press conference.

All of that will be market moving as well.

Our opinion: It’s time to cut rates, and waiting until September takes an unnecessary risk that we will turn to recession given that the unemployment rate has risen to 4.0% from 3.4%. Further, 43% of small businesses in the US were unable to fully pay their rent in April, the highest share since March 2021.

Story

Today we received the CPI report and later today we will receive the fed’s interest rate decision which will be to keep rate unchanged.

CPI and Core CPI for the month over month (MoM) measure and the year over year (YoY) measures all came in below estimates.

• US Inflation Rate (CPI YoY):
  • 3.3% vs 3.4% consensus and 3.4% prior.
• US Inflation Rate (CPI MoM):
  • 0% vs 0.1% consensus and 0.3% prior.
• US Core Inflation Rate (Core CPI YoY):
  • 3.4% vs 3.5% consensus and 3.6% prior.
• US Core Inflation Rate (Core CPI MoM):
  • 0.16% vs 0.28% consensus and 0.3% prior.
  • Lowest since August 2021

Here is a chart of Core CPI YoY (Source); it’s the lowest in more than three-years:

As we have said ad nauseum, there is no inflation in the United State above the Fed’s 2% target, it’s simply the lagged measure of rent (cost of shelter), specifically owner’s equivalent rent (OER), that has the entire world economy on its knees.

Owner’s equivalent rent is the hypothetical rent a homeowner would pay if they rented their own home.

Both rent of primary residence and OER MoM inflation were almost exactly the same in May as in April. There is however, finally, a trend over the last three-months:

These shelter costs make up 42% of Core CPI.

Here is a chart from Gregory Daco of inflation with shelter called out in the orange. Again, there is no inflation issue YoY, it’s all shelter (this is from before this latest CPI report):

And what about shelter makes it so that we can discard the data as not representative?

We have real-time rent data that is factual, as opposed to owner’s equivalent rent which is the hypothetical rent a homeowner would pay if they rented their own home.

Here is a chart: the yellow line is the lagged CPI measure; the red line is from Zillow and the black line is the BLS’ own real-time measure, newly introduced, because exactly of this lagged problem:

Inflation is over.

Here is a chart from Jason Furman of Core CPI ex-shelter and used vehicles: it’s negative for the month and at 2.0% for the last three-months.

A final chart looks at harmonized core CPI inflation (from the BLS) before this cooler than expected CPI report:

Harmonized CPI (HICP) measures consumer price inflation using market prices and a standardized method across EU countries, while regular CPI measures inflation within a specific country and does not necessarily use market prices.

1. Further, core goods costs saw 1.75% decline YoY (as in -1.75%).

Rates have dropped on the news, as they should:

And the probability of a rate cut in the July FOMC meeting has risen to 14.5% and to nearly 73% in September.

We believe that if the various flavors of inflation coming out before the July 31 FOMC meeting (PCE, PPI and the next CPI) are cool and the unemployment rate continues its rise (from 3.4% to 4.0%), the Fed could cut in July… the Fed should cut in July.

 

Conclusion

The Fed will deliver a decision today, we will receive a new dot plot (Fed projections for inflation, GDP, and the labor market) and Chairman Powell will hold a press conference.

All of that will be market moving as well.

What the Fed thinks about inflation and the underlying economic data is the only thing that matters. The economy appears to be healthy but there are signs of consumer weakening.

Our opinion: It’s time to cut rates, and waiting until September takes an unnecessary risk that we will turn to recession given that the unemployment rate has risen to 4.0% from 3.4%. Further, 43% of small businesses in the US were unable to fully pay their rent in April, the highest share since March 2021.

Thanks for reading, friends.