CPI Review: Unchanged Fed Confidence

Summary

• April core CPI at 29 bp MoM was in line with expectations of 0.3% MoM and well above the Fed’s target.
• The details show inflation trends are improving little: housing inflation remains stable and high, while supercore inflation is accelerating.
• April PPI and CPI suggest core PCE around 0.3%, inconsistent with the Fed’s end-2024 forecast.
• This week’s PPI and CPI data is unlikely to have changed the Fed’s confidence in disinflation.

Market Implications

• I still expect no 2024 cuts and the June dot plot to show only one to two 2024 cuts, against three in the March plot. This compares with the market pricing two cuts by end-2024.

Core CPI Unchanged

April CPI was roughly in line with market expectations, with headline MoM below consensus and against Sam’s expectations of a small positive surprise in YoY core (Table 1).

A breakdown of key components also shows little change (Table 2). Core goods prices remained flat, OER was unchanged, and supercore inflation slowed but from a very high level in March. The median price CPI, a more reliable indicator of trend than core, was unchanged from March at 35bp.

Core Goods Prices Generally Flat

Excluding used cars, core goods inflation remained close to zero, despite the recent increase in the PPI (Table 3; Chart 1). Used car prices fell at around the same pace as in March.

Stable and High Housing Inflation

April OER was virtually unchanged from March at 42bp MoM (Chart 2). On a 6m SAAR basis, OER remained stable above 5.6%.

Housing market fundamentals suggest limited downside to housing services inflation (Chart 3). Vacancies are rising but remain well below pre-pandemic. Population growth (proxied by NFPs; Chart 3) is higher than pre-pandemic, adding to housing demand.

Slowdown in Supercore CPI – From Very High Level

April core services ex housing (supercore) inflation slowed to 42bp, from 65bp in March (Chart 4; Table 4). On a 6m basis, supercore CPI inflation has been accelerating since Q3 2023.

Healthcare and transportation inflation slowed, but recreation and other personal services accelerated. Education and communication inflation was roughly unchanged, as was hotels.

Wages are the most important long-term driver of supercore inflation (Chart 5). Despite the ongoing slowdown in wage growth, super core CPI inflation has kept accelerating.

Unchanged Fed Confidence

The Fed is hoping to go back to pre-pandemic inflation trends where zero goods inflation offset above-target housing inflation (Chart 6). Today’s CPI release did not bring inflation closer to that goal: housing inflation remains stable above 5.5%, and supercore CPI inflation trends remain upwards.

However, core CPI overall remained around 0.3%. So today’s print did not worsen the inflation outlook.

Furthermore, the Fed is more focused on PCE than CPI inflation. For core PCE to hit the Fed’s Q4/Q4 forecast of 2.6% YoY, core PCE would average 17bp a month until December. The combination of today’s CPI and yesterday’s PPI suggest April core PCE somewhat below 0.3%, i.e., still inconsistent with the March SEP 2024 forecast.

Market Consequences

Following CPI and retail sales (which showed a limited downside surprise), markets raised expectations of Fed easing. The OIS based December 2024 FFR fell 8bp to 4.82%. Markets now price roughly two Fed cuts by end-2024.

I do not think today’s data justifies such optimism and stick to my expectations of stable 2024 core PCE around 3% and therefore of no cut in 2024.

In addition, I think the CPI print suggests the Fed will revise down the number of 2024 cuts in the June dot plot: I now expect one to two 2024 cuts, against three in the March 2024 plot.

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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 publishes the blog Macro Sis that discusses the drivers of macro returns.

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(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.)