Looks like no rate cuts in June. The latest CPI report was a bit hotter than expected and is starting to confirm recent trends. With this report, the good jobs reports, the current GDPNow projection showing a strong economy with wages still rising above even this level of inflation the Federal Reserve has little reason to change rates up or down. Add in the most recent PPI Report (producer price index) and a more complete picture emerges of a strengthening economy that is continuing to meet demand, but with a strong labor market.
Three months of data is enough to start to tease out a trend and what we seem to have now is a rapid slowing and flattening of the downward trend in inflation. The main part of that flattening is the persistent level of Shelter inflation. Many people including myself felt the way owners equivalent rent was calculated was distorting the true picture of Shelter inflation trends slowing it unnaturally, however it has persisted well past the time that effect should have shown itself and it has not.
Looking into the categories
Food is flat and running below the long term inflation target of 2%. Food at home continues to run below food away from home. However it is an up and down balance certain high visibility items rising like eggs, with meat canceling the declines in dairy.
Energy the other non-core component again visibility is mixed as before seasonal adjustment gas rose 6.4%. The year over year numbers are pretty spot on the target with Electricity the outlier at 5%.
Core-CPI the measure that the fed uses at 3.8% year over year was dominated by shelter up 5.7% and accounts for 60% of the total. Other big contributors above target were personal care at 4.2% and vehicle insurance at 22.2%.
Overall the picture shows that the economy has stabilized at a pretty good level but with tight labor markets and so strong demand inflation is going to stay above target longer than expected. That also means with tight labor markets supply of things like shelter and electricity will be slower to meet demand. So inflation has reached a plateau on its downward path.
Looking a bit closer at PPI we can see that goods prices continue to fall but service the worker intensive sector holds or rises. Noted that in the latest report that brokerage services is the biggest driver in the service number, to me that indicates along with falling good inputs that more goods are coming on line and users and producers need that mediator. That also could indicate another round down in the inflation number in the late spring early summer.
All in all with most policy options off the table we have a normalized economy on a pretty good path, but really just coasting. What the administration is able to do is minimal at this time and will almost all be on the demand side (like student loans) in the near term and that is actually something that will put upward pressure on inflation however minor. If by some unlikely means the aid package with the border deal passes the immigration part could change that a bit as a regulation of status would allow more labor input into several of the critical inflation drivers of Shelter and Food.