April 2023 CPI – High and Stable Inflation

Summary

• April CPI did not show incremental progress on disinflation, as a large increase in used car prices offset slower inflation in other categories.
• An ongoing recovery in rental indices suggests the progress on shelter cost inflation could turn out to be transitory.

Market Implications

• The market is under-pricing the risk of a 25bp hike at the Federal Reserve (Fed)’s June FOMC meeting.

CPI Aligns With Expectations

April MoM headline and core CPI were 0.4%, in line with expectations (Table 1). A large increase in used car prices was offset by a slowdown in other categories.

The Cleveland Federal Reserve’s April YoY median price CPI, that is a better measure of inflation trends than core when prices are volatile, was 7.0%, down 10bp from March (Chart 1).   The YoY median price CPI has remained around 7% since September 2022.

Core Goods Inflation Accelerated

April core goods inflation rose to 0.6% against 0.2% in March due to a 4.4% MoM increase in used car prices. Inflation in other categories of core goods slowed relative to March (Chart 2).

Used car CPI inflation has started to converge to the Manheim used car auction results, which suggests further upside (Chart 3; Used Car Price Rises to End Disinflation).

Shelter Inflation Slowdown Could Prove Transitory

April shelter inflation at 42bp MoM was 14bp below March’s 56bp. However, Zillow and Apartment List rental indices continued to rise in April, which could signal future upside to the shelter CPI (Chart 4). Furthermore, listed landlords, such as Invitation Homes and American Homes 4 Rent, reported rising or stable rents.

Slower Services Inflation Ex Shelter

April core services ex shelter inflation was 22bp MoM against 31bp in March. Transportation services inflation fell 0.2%, contrasting with MoM increases above 1% in March and February (Chart 5). Medical services inflation fell 0.1% MoM, but this was due to a 3.8% MoM decline in medical insurance costs, which itself reflects accounting conventions rather than actual costs (Health Care Costs to Trend Higher). Excluding health insurance, April medical services inflation was 24bp.

Market Consequences

Overall, neither core inflation nor median price CPI show much of a slowdown. At the same time, the data shows only limited evidence that a credit crunch is smothering aggregate demand. Should this, strong growth, and inflation prints continue, and barring a debt ceiling crisis, the Fed is likely to hike 25bp at the June meeting.

My view compares with virtually no hike currently priced by the market.

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed, the IMF, and the World Bank. She joined Macro Hive soon after its inception.

Photo Credit: depositphotos.com

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)