The Consumer Price Index increased by 0.4% m/m in March, accelerating to 3.5% y/y from 3.2% in the prior month. We have highlighted in the past how slowly the Shelter component was decelerating and what that would mean in terms of holding the headline CPI number higher. In the latest update, Shelter increased by 0.4% m/m, decelerating to 5.7% y/y from 5.8%, contributing 2 percentage points to the headline y/y growth rate. The Shelter component has not advanced at a m/m pace slower than 0.3% since August 2021. If that trend were to continue, Shelter would not move below 4.0% y/y growth until early 2025. This is important because that would mean Shelter could still be contributing more than 1.25 percentage points to headline CPI twelve months from now. Thus, in the near term, we are focused on the other two-thirds of CPI, as that piece will likely be the driver of directional changes in headline CPI and could ultimately influence Fed policy decisions. We can measure the other two-thirds of CPI via the All Items less Shelter Index, which increased by 0.4% m/m to a y/y growth rate of 2.3%, up from 1.8% in the prior month.
Source: Macrobond.
While there are plenty of ways to analyze the underlying components, this high-level overview points toward more signs of a reversal in the downward trajectory of inflation that we observed from June 2022 through the middle part of 2023. If inflation were to continue accelerating, it would likely reduce the probability of rate cuts from the Fed in 2024, which the Fed Funds Futures market has been starting to price in recently.
Source: Bloomberg.
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Investment Strategist
Boyd Watterson Asset Management, LLC