US Inflation Slows but Remains Above Expectations

Stock bulls take a step back as the latest Consumer Price Index indicates the decline in inflation may be slowing. The hotter-than-expected CPI report now gives many Wall Street bears reason to believe the Fed could make a third-rate hike by this summer.

CPI

The CPI showed headline inflation at an annual rate of +6.4%, a slight slowdown from +6.5% in December but above Wall Street expectations. Rising shelter costs accounted for about half the CPI’s monthly increase. The shelter component, the largest contributor to CPI, was up +7.9% from a year ago.

Meanwhile, energy and food costs were up +8.7% and +10.1%, respectively. Egg prices alone are up a whopping +70% from last year.

The Fed prefers the core inflation gauge that removes volatile energy and food costs but the data makes it clear that super-hot housing prices, along with elevated rents, continue to be one of the biggest drivers of inflation.

There is a significant lag in the CPI’s shelter calculations, however, and it does not reflect real-time housing costs that have begun to decline.

To account for this, the Fed has been tracking what’s known as “super-core” inflation, which is core services inflation minus shelter prices. That rate is running considerably lower at +4% year-over-year, though that’s still double the Fed’s target of +2%.

Keep in mind, super-core inflation is not how the Fed is measuring overall inflation. They use it mostly as a way to track “sticky” inflation trends in an effort to determine where inflation is going and how fast.

Though declining housing costs should begin to show up later this year, bears argue that inflation in other areas is likely to keep high prices underpinned. Dallas Fed President Lorie Logan on Tuesday warned that she is concerned about higher commodity inflation as China reopens from its Covid lockdowns.

Economy and Data

Logan also believes the strong US labor market is another risk. Food prices could certainly remain elevated as the war in Ukraine continues and with Russia again threatening to abandon the Black Sea grain deal that has allowed the flow of critical agricultural exports.

Crops around the globe are also at risk from current weather trends, particularly drought, while the ongoing bird flu pandemic obviously threatens egg and poultry supplies.

We also can’t forget the change in weather patterns from La Niña to El Niño that is expected this year and could create a whole new range of threats to global food supplies. South and Central America are particularly strongly influenced by El Niño.

Bottom line, it remains challenging to determine where the endpoint might be for the Fed’s hiking campaign and so long as that remains a moving target, it will likely be tough for bulls to gain any meaningful traction.

Bulls are hoping economic data today might provide more positive proof that the US economy is indeed slowing. Retail Sales, Empire State Manufacturing, Industrial Production, Business Inventories, and the Housing Market Index are all due out this morning.

On the earnings front, American Water Works, Analog Devices, Biogen, Cisco, Invitation Homes, Kraft Heinz, Marathon Oil, Roblox, Shopify, Southern Copper, and Zillow are the highlights.