U.S. Economics – Inflation

Labor Market

The Signals:

• Consumer Price Index (Chart 1)
  • On a m/m basis, Headline CPI rose by 0.39%, its third consecutive month posting sequential increases and marking its sixth month in a row above its 2015 to 2019 average pace of 0.15%.
  • While the y/y trend has cooled from cycle highs made in 2022, the growth rate has remained above the Fed target rate and the most recent three months exhibited rate of change accelerations, moving from 2.4% in September to 2.9% in December.
    • We focus on the rates of change in economic measures, but the level of growth in inflation has been important to monitor due to uncertainty related to the Fed’s expectations for the path of inflation relative to their 2% target and subsequent monetary policy decisions.

• Shelter (Chart 2)
  • The pace of Shelter slowed to 0.26% m/m from a 0.34% rise in the prior month, inching below the 2015 to 2019 average pace of 0.27%, only its third month coming in below that mark since August 2021.
  • With a 4.62% y/y print, its slowest pace since January 2022, Shelter still contributed 1.66 percentage points to Headline CPI.
    • In terms of CPI weights, Shelter accounts for 37% of the basket, meaning the level of the growth rate and directionality of this component have a significant impact on Headline CPI trends.
    • The largest component of the Shelter basket is Owners’ Equivalent Rent (OER), a measure that captures home price growth from twelve to eighteen months ago, which means we could see rising OER growth based on home price dynamics from that timeframe.

• All Items excluding Shelter (Chart 3)
  • Excluding Shelter, all other items calculated in the CPI accelerated by 0.47% m/m, its fourth month of sequential increases and fourth month moving above its 2015 to 2019 average of 0.09%.
  • The y/y growth rate accelerated to 1.94% and contributed 1.23 percentage points to Headline CPI, both well above their 2015 to 2019 averages of 0.70% and 0.47 percentage points.
    • Given the already large contribution from Shelter, the rest of the CPI basket would have to disinflate by roughly 130 basis points to make the Fed’s 2% target more approachable if Shelter stayed flat from here.

• Commodities (Chart 4)
  • Adding to near-term inflationary forces, the FTSE/CoreCommodity CRB Total Return Index reached its highest level since September 2008, up 9.9% over the last three months and 22.4% y/y.
    • This development could make its way into inflation indexes through the energy and/or food components, which already subtracted less/contributed more in November and December than they had in prior months.

The Takeaway:

• The data we monitor continues to suggest that inflation, as measured by the Consumer Price Index, will likely remain above the Federal Reserve’s inflation target rate of two percent through at least the first quarter.
• Historically, it would be unusual to see a period of continuous rate cuts within an economic environment where inflation is high and rising while real GDP is at or above 3% on a y/y basis.

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.