Inflation: not that easy to handle

The markets have been anticipating that the Fed will begin to cut the fed funds rate in June in expectation that inflation will subside.

https://www.wsj.com/economy/inflation-february-cpi-report-interest-rate-b827c0e7

Inflation Picks Up to 3.2%, Slightly Hotter Than Expected

Core prices, which exclude food and energy items in an effort to better track inflation’s underlying trend, were up 3.8% from a year earlier

By Justin Lahart and Nick Timiraos, The Wall Street Journal, Updated March 12, 2024

Services prices remained elevated, rising 0.5% from January, and 5% from a year earlier. That was driven, in part, by continued strength in housing and other shelter costs, which rose 0.4% from January. The Labor Department derives housing costs for both renters and homeowners from rents, but its measure lags behind movements in newly signed leases, which have been cooling.

Services prices excluding energy services and housing costs—the so-called supercore measure that the Fed has highlighted—rose 0.5% on the month. That was lower than January’s 0.8% gain, but was elevated in comparison with readings during the fourth quarter… [end quote]

The Fed follows the PCE index more than the CPI. But inflation-adjusted bonds, like I-Bonds and TIPS, use the CPI.

Wendy

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Housing is the main culprit.

Other things are coming down in price.

Diesel is coming down in price which will bring down transport costs for goods. Or diesel will be coming down in price soon because of an easy winter.

Seems like inflation dropped to about 3% or so and has been stuck there for about 8 months. I haven’t looked in detail, but eyeballing the charts makes it look that way. And gasoline went up in February, and continued going up in March, AND the “comp” from last year appears to not help the numbers next month. Maybe no rate cut until May or June? But they want to cut a little, but not too close to the election, so maybe they’ll do a preemptive cut now-ish and then see what happens with the numbers?

My money is on July. Bond market is predicting June - but two months ago it was predicting March.

The FED can not cut because the main thrust of the inflation is housing. The loans would be more inflationary at lower rates. There is a risk rates go higher. We had an annualized 4.9% growth in the 3rd quarter. There was 3.2% in the 4th quarter. The economy can take higher rates

I corrected my prior statement from a moment ago.

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CPI Shelter (YoY) is continuing to drop about 0.25 per month. At this rate, the 3.5% baseline will be reached in November.

CPI less Shelter (YoY) has been below 2% since June 2023, and is close to its 1.7% baseline.

baseline is:
CPI = (Shelter + 2 x lessShelter)/3
2.3 = (3.5 + 2*1.7)/3

now at:
3.17% CPI
5.76% Shelter
1.81% less Shelter

Consumer Price Index for All Urban Consumers: All Items Less Shelter

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