CPI Report Indicates Inflation is Cooling Down Again…Trend or Outlier?

Markets cheered this week’s CPI release as core CPI dropped to 3.6% annually, the lowest in 3 years.   The report came on the heels of 4 months of hotter than expected CPI reports that significantly dampened any rate cut expectations. Some aspects of the report were particularly encouraging. Food costs (at home) showed no increase with a slight increase in food at restaurants (an indication that labor costs are still rising), shelter costs were high but moderated slightly. 

Coming on the heels of Fed Chair Powell’s statement that the Fed is most likely finished with rate increases, treasuries rallied down to 4.33% (down from 4.70% in late April). The question that will drive rate expectations:  Does this signal a return to disinflationary trends? Let’s watch the two big drivers, employment and consumer strength. Recent data shows that the long awaited “consumer pullback” is occurring. The San Francisco Fed reported that pandemic era excess savings are nearly depleted. Starbucks, McDonalds, Yum Foods and other retailers are reporting lower sales for 2024 Q1. Home Depot indicated consumers are delaying planned spring projects. Much of the pullback is due to inflation as many prices have increased 20% since spring 2021. 

Let’s take a peek at next month’s predicted PCE and CPI numbers courtesy of the Cleveland Fed’s “Nowcasting” predictions (below). The April core PCE (released in 2 weeks) is predicted at 0.23% with May CPI and PCE predicted at 0.11% and 0.12% monthly. That’s within the Fed’s target. Stay tuned…

By David R. Pascale, Jr., Senior Vice President at George Smith Partners.