Reasons for optimism in the CPI report

The eagerly awaited April CPI data for the US finally arrived yesterday, with the actual numbers closely matching the consensus forecasts, with both Headline and Core at 0.4% MoM, and the YoY numbers at 4.9% and 5.5% respectively. Although we think the MoM data remains too high for the Fed to celebrate a triumph in the uncomfortably long battle against inflation, some of the trends and details in the report are encouraging.

The Shelter component (which includes the Owners’ Equivalent Rent) continued to decline meaningfully from a monthly figure of 0.8% in February, to 0.6% in March, to 0.4% MoM in April while on a YoY basis this component, which accounts for 34.5% of the headline basket, is still running at 8.1% and showing signs of a peak rather than a decline. The annualised monthly 0.4% in April though equates to 4.8% and if this 0.4% MoM stays around these levels that would shave off just over a percent from the inflation number alone. It is worth noting though that a softening of Shelter inflation was widely expected given the strong correlation with past house price inflation and the latter is certainly trending downwards currently. Having said that the timing and magnitude of the moves were a bit uncertain so it’s definitely good news to see this in the actual data.

Services inflation (which includes Shelter) came at 0.4%, unchanged from March’s reading. Core Goods inflation came at 0.6% MoM, but a good chunk of this is explained by the volatile Used Cars component, which jumped 4.4% MoM. Core Goods inflation had found a floor in the last few months in line with the normalisation of supply chain issues. In fact MoM Core Goods inflation had hovered around the zero mark since September last year. This jump in Used Cars prices took the monthly Core Goods inflation to 0.6% but it is unlikely to be sustained in our view which should bring Core Goods prices off this mini peak in coming months.

Regarding the also volatile Food and Energy categories we had good news. Although Gasoline prices did increase in April this was attributed to WTI prices increasing by 25% from mid-March to mid-April; since then WTI is down 13%, which should be reflected in May’s numbers. Food inflation came at 0% MoM for a second consecutive month and has been in a descending trajectory for nine months now. Finally, it is also worth noting that “Super-Core” inflation, which excludes the cost of shelter and has been referred to by Jerome Powell recently, fell to 0.1% MoM, its lowest reading in 8 months.

While YoY inflation data was stable compared to last month, the important components seem to be cooling off meaning some of the underlying trends that underpinned CPI on the way up are now reversing, albeit other components are taking a bit longer than expected, notably Shelter in the CPI basket. Outside of the CPI data, the most obvious economic factor that has not shown decisive signs of moving in the direction the Fed wants is the labour market. Here the impact in the CPI basket is indirect through wages, and in turn, in the labour-intensive Services sector. Nevertheless, Services inflation found a MoM peak in September 2022, which is encouraging.

In conclusion, yesterday’s CPI report, along with the SLOOS report published earlier in the week showing a continuation of the tightening of financial conditions and dimming demand for credit, should give the doves in the FOMC additional data points to argue for a pause in their next meeting.