Mercifully for a Fed leadership that’d prefer to take a break from raising rates (if only to raise them again later), US inflation data released on Tuesday was in line with consensus.
Core prices rose 0.4% in May from April, the BLS said. It was the sixth consecutive month during which core prices rose 0.4% (or more) from the prior month. That doesn’t bode well for policymakers’ efforts to rein in the hottest price growth in a generation.
The MoM print on the headline gauge, at 0.1%, likewise matched estimates. On a YoY basis, the headline gauge rose an as-expected 4%, while core price growth was 5.3%, a touch above consensus.
I should reiterate that these monthly core prints won’t work in perpetuity. The bar for a hike at this week’s FOMC meeting was pretty high, where that means a core print of at least 0.5%. But what’s acceptable in the context of the “pause” debate for June is totally different from what’d be considered acceptable from the perspective of getting inflation back down to target over the long run.
All of the main energy gauges posted meaningful monthly declines, but the food indexes rose. After two consecutive MoM declines, grocery prices ticked higher, although the YoY pace is now “just” 5.8%. The 12-month increase on the electricity gauge is now down to 5.9%.
Americans no longer face double-digit annual inflation for electricity and groceries. For what probably seemed like a very long time to families with limited incomes, price growth for both was running well above 10%.
I still think it’s worth highlighting the figure above. Although electricity wasn’t always a “necessity” for humans (it’s a relatively new invention), people do generally enjoy it. Families also enjoy food, I’m told.
Another thing people enjoy is shelter, and unfortunately, the monthly gains on the associated indexes are still much too hot, to say nothing of the 12-month prints.
The shelter gauge itself came in at 0.6% for May, up from April’s 0.4%, and consistent with a long streak of large increases. OER was 0.5% for the second straight month. That’s obviously down from the (twin) peak 0.8% prints in September and December, but note that on an unrounded basis, you have to go all the way back to January of 2000 to find a 0.5% MoM OER increase (and before that, 1994).
On a YoY basis, OER and rent of primary residence are still running north of 8%. Eventually, these measures are supposed to catch down to the national home price aggregates. We’re still waiting, and while we’re waiting, home prices on the same indexes are rising again on a monthly basis.
Used vehicle prices rose sharply for a second month in May, Tuesday’s data showed, but the Fed can probably look through that. Wholesale prices are falling+, and that’ll show up on a lag.
Elsewhere in the report, the apparel gauge rose 0.3% for a third straight month (after consecutive 0.8% increases at the beginning of the year), the transportation services measure posted a 0.8% gain and new vehicle prices receded a bit.
All in all, the report clears the way for a Fed pause (or “skip”) this week, but as discussed here on Sunday, there’s nothing to celebrate. These figures aren’t consistent with price stability as (arbitrarily) defined by policymakers.
I’d be remiss not to note that the super-core measures (core services ex-shelter and core services ex-rent/OER) weren’t too bad, although the latter was double April’s MoM increase.
“We’re sympathetic to the argument that by backing out the various pillars of strength within the inflation numbers, any strength in consumer prices can be explained away,” BMO’s Ian Lyngen and Ben Jeffery wrote Tuesday. I’m not sure whether that was an attempt at dry humor, but if it wasn’t, it should’ve been.
Still seems fairly primed for further decline as COVID related and COVID gvt reactions-related issues dissipate.
Inflation is trending lower- that is disinflation. If the Fed does not want deflation they should tread carefully. So CPI is now 4% and Fed funds target is 5-5.25%. This is mildly tight- not loose. There are still problems in the banking system. Recently that problem is a funding and duration mismatch problem. If the Fed is not careful, it will morph into a credit problem. In fact that may already be happening. To avoid the idiot in the shower problem, the Fed needs to look forward and have a view on what is now happening and what is likely to happen over the next 3-6 months. The trends suggest that 5-5.25% is gradually slowing price increases. The level of the US $, yield curve, PPI, and many other metrics suggest things are slowing. The analysts pushing the Fed to continue to tighten are likely fighting the last war.
Total banks loans and leases dipped in the two weeks post-SVB, then resumed their growth which continues now. With banks growing, not shrinking, their loan book, there isn’t a credit tightness problem. Some types of borrowers may be finding the bank credit door closed. Some banks may be feeling NIM squeeze and lower profitability. None of that is the Fed’s concern.
https://fred.stlouisfed.org/graph/?g=167Al
Investors look at the Fed pausing with core CPI stalled at 2.5X the Fed’s target, the FF rate still below core CPI, asset prices rising or seemingly bottoming, consumer spending not weak, labor market historically tight . . .
The impression is of a timid Fed, a Burns in Vockler’s clothing, a Fed that won’t actually hold rates high er for longer, a Fed that is losing its ability to make the market fear it. Which is bullish for risk assets. Wilson etc can be completely right on the earnings, but if investors don’t feel fear, the multiple can inflate along with everything else.
I should amend that post. I think equity investors increasingly don’t even believe in a Fed “pause” – more are starting to think the Fed is done, full stop, so the future as far as the eye can see (for equity investors, that’s six months) is a party with the parents absent. Who cares about inflation if your time horizon is several months?