U.S. Economics – Inflation

Intro

Headline inflation softened in March, with the Consumer Price Index (CPI) posting a marginal monthly decline and the annual rate easing to 2.41%, down from 2.81% in February. Underneath the headline, we mostly saw a continuation of the trends that have been in place since early 2023, a slowing but elevated contribution from shelter and volatile energy prints. Based on the current growth rates of shelter and the lagged effect of home prices entering the CPI calculation, alongside the comparison set for energy after April, it remains unlikely for CPI to get to the Fed’s target. To track whether this setup is likely to unfold, we will watch for demand-side risks related to a possible rerating of consumer credit scores as student loans start to be reported to credit bureaus and potentially lumpy initial claims data as government-related layoffs roll into the data.

Inflation

The Signals:

• • Consumer Price Index (Chart 1)
    • The Consumer Price Index declined by 0.05% m/m in March, following a 0.22% gain in February.
      • On a y/y basis, CPI slowed to 2.41% from 2.81%.
      • Despite the deceleration, it remains above the Fed’s 2% target and its 2015–2019 average of 1.55%.
  • Contributions to CPI (Chart 2)
    • Shelter contributed 1.43 percentage points to headline CPI y/y growth and All Items excluding Shelter added 0.96 percentage points.
      • While both series slowed sequentially, the contribution from Shelter remained elevated and the deceleration in All Items excluding Shelter was largely driven by a 0.36 point drag from Motor Fuel.
      • Shelter’s largest component, Owners’ Equivalent Rent, has yet to reflect less negative rent price growth and an acceleration in home prices, a dynamic which has historically led to rising OER contributions.
      • The end-of-month average gasoline price tends to move directionally with Motor Fuel and will face its toughest y/y comparison in April before easing through September, which means the disinflationary impulse we saw in March, and are likely to see again in April, could reverse.
  • Student Loan Delinquency Rates (Chart 3)
    • Flows into early and serious delinquency for student loans have been artificially low over the last few years, but that is likely to change as credit bureaus adjust consumer credit scores to accurately reflect balances past due.
      • On the demand side, access to credit, including credit card, auto, and home loans, could be hindered for consumers that carry student loan balances and have to adjust post-pandemic spending habits to meet payment dates.
  • WARN Notices (Chart 4)
    • By aggregating company reported layoff notices, we can gauge probabilities for the direction of initial claims on a one quarter lag.
      • Recently, WARN notices have been rising again but not to levels that we observed in 2023 or 2024.
      • If layoffs were to increase meaningfully, we would expect to see a deceleration in demand, which would likely lead to a change in our inflation expectations.

The Takeaway:

• CPI slowed y/y in March, largely due to a decline in Motor Fuel – a volatile component that will likely slow again in April.
• Thereafter, however, we would likely have to see other economic measures move in a direction that would negatively impact demand, such as a decline in consumer credit access or rising initial jobless claims.
• Without a more meaningful decline in demand, Shelter and other components outside of Energy are likely to keep headline CPI above the Fed’s target.

Visuals:

(Chart 1)

(Chart 2)

(Chart 3)

(Chart 4)

Source: Macrobond

Market Trends:

Source: Macrobond

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.