Inflation Abates, Lag Effects Starting To Take Hold
Though CPI came in cooler than expected, it still means that the dollar is losing about 5% of its purchasing power on a year-over-year basis. Effects of increased interest rates impacting the economy.
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U.S. inflation showed continued signs of moderating in April, according to the Consumer Price Index figures that came in this morning. On a year-over-year basis, CPI came in at 4.9%. This is the first sub-5% reading in two years, and also notable for being the 10th consecutive monthly decline for the year-over-year reading — the longest streak in the history of the data. With inflation coming in slightly lower than consensus estimates for the month of April, markets increased the probability of a pause in the Fed’s tightening cycle rather than another upcoming hike, a net positive for risk assets in the interim.
“We view today’s CPI report as supportive of our call for a pause at the June FOMC meeting, because the shelter stepdown looks increasingly durable, inflation breadth softened somewhat further, and the strength in used car prices is likely temporary.” — Goldman Sachs
While prices are still rising for the American consumer, the rate of increase has been decelerating for the longest period in history, which is a positive sign for markets that were caught blindsided by the fastest tightening cycle in history, following the not-so-transitory inflation spike.
Let’s dig into the components of inflation to gain more insight into what is driving price increases at this phase of the business cycle.
Both CPI and Core CPI (excluding food and energy) came in at 0.4% month-over-month (approximately 5% year-over-year), still higher than the Fed’s 2% stated target. Shelter costs — the largest component of the services sector — increased by 0.4% last month, its smallest increase in over a year at the same time as prices for airfares, hotels and new cars fell.
The deceleration in shelter prices is a positive development for markets, a sign that the lag effects of tightening are beginning to be reflected. Shelter prices, which historically comes with a lag, wildly understated the effects of loose monetary policy for much of 2021 and 2022, and now appears to be following rent prices to the downside on a rate-of-change basis.
A look at the cumulative percentage change in both rents and shelter prices demonstrates the lagging effects of shelter prices, which account for more than a third of the index. Based on the trend, further deceleration in the shelter inflation rate should be expected for the rest of the year.
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A look at how wage growth has compared to inflation-adjusted real wages. 🎈
Are positive real yields on the horizon? 🌅
Historical data around tightening cycles and unemployment. 💼