TLT - May CPI: Very Bullish As Inflation Recedes As A Macro Threat
2023-06-13 09:52:47 ET
Summary
- We summarize key data and provide an in-depth analysis of the monthly Consumer Price Index report released by the U.S. Bureau of Labor Statistics.
- Both All Items and Core CPI were approximately in line with expectations.
- Excluding volatile items, such as used cars and trucks, overall core CPI trends look better than today's figures suggest.
Summary Data and Analysis
A summary of key data and analysis for this month's CPI report is provided in Figure 1.
Figure 1: Change, Acceleration, Expectations, and Surprise
Core & All Items CPI (BLS, Investor Acumen)
All-Items CPI deaccelerated on a MoM basis and just missed expectations. Core CPI slightly accelerated for a gain on a MoM basis and was roughly in line with expectations.
Analysis of Core and Non-Core Plus Key Sub-Components
In Figure 2, we break down the analysis of change and acceleration of CPI into Non-Core and Core components. We further analyze two key subcomponents of non-core CPI and three key subcomponents of core CPI. Although all five columns in the table provide important information, we recommend that readers pay special attention to the rightmost column (Cumulative Contribution to Acceleration), as it reveals exactly what drove the MoM acceleration/deceleration in CPI during the current month compared to the prior month.
Figure 2: Analysis of Key Aggregate Components of CPI
Aggregate CPI Component Analysis (BLS, Investor Acumen)
As can be seen in the table above, Energy deaccelerated significantly, accounting for most of the overall deacceleration in All Items CPI.
Core Services except Housing - the indicator the Fed is currently paying most attention to - deaccelerated significantly. As we shall see below, overall core CPI was boosted by volatile items such as used cars and trucks.
We now proceed to analyze the CPI report in greater depth. For more detailed information on how to read and interpret the tables and graphs in this article, please see the following Seeking Alpha blog post .
Contributions to Monthly Change in Core CPI
In Figure 3, we provide a bar chart that highlights the major positive and negative contributors to the MoM percent change in Core CPI. These contributions take into account both the magnitude of the MoM change in each component as well as the weight of each component in CPI.
Figure 3: Top Contributors to MoM Percent Change
Top CPI Contributors (BLS, Investor Acumen)
Once again Owner's Equivalent Rent and Used Cars & Trucks were the most important positive contributors to the monthly change in CPI. The latter item tends to be quite volatile. Of particular note is that Used Cars and Trucks -- a volatile item -- lifted monthly core CPI by 0.11%.
Going forward core inflation should continue to decelerate as prices for volatile items normalize. Most importantly, it should be noted that real-time indicators suggest that there will be significant disinflation in the housing components of CPI later this year.
Contributions to Monthly Acceleration in Core CPI
In Figure 4, we provide a bar chart that highlights the major positive and negative contributors to the MoM acceleration in Core CPI. These contributions take into account both the magnitude of the MoM accelerations in the components as well as the weight of each component in CPI.
Figure 4: Top Contributors to MoM Acceleration
Top CPI Acceleration Contributors (BLS, Investor Acumen)
It's worthwhile to examine this table carefully, as it's likely to include most or all of the items that caused deviations from forecasters' expectations of Core CPI.
Lodging away from home was the largest contributor to acceleration of Core CPI in May. This tends to be a volatile component. The large contribution of Other Transportation is also likely to be a one-off.
For the complete breakdown, please see the following CPI Breakdown table posted on our site each month.
Top Movers
For general interest purposes, in Figure 5 we highlight the CPI components (most granular level) that exhibited the largest positive and negative change during the month. The YoY change in these particular components is displayed to the right.
Figure 5: Top Movers MoM Percent Change
Top CPI Movers (BLS, Investor Acumen)
In May, Frozen noncarbonated juices and drinks registered the largest price increase. Egg prices continue to collapse, after experiencing a prolonged period of high inflation.
Implications for the Economic Outlook
This report was very good news for the economic outlook, going forward. Core inflation is in a confirmed decelerating path – particularly core services ex housing, which is the Fed’s most-watched metric right now. Excluding volatile components, Core CPI trends look better than what was reflected in the aggregate number this month.
This report largely removes inflation as an issue for the macroeconomy -- at least temporarily. It very much supports a Fed "skip" for the June meeting and increases the probability of another skip in July.
With pressure on the Fed and on fixed income markets alleviated, probabilities of a "soft landing" have marginally increased.
Implications for Markets
Markets should react positively to this CPI report. The report confirms underlying disinflationary trends. And the underlying details of the report were better than the top-level numbers suggest.
At this point, the main thing left for markets to "worry about" is decelerating economic growth. However, in this particular regard, the market now has one less thing to worry about, which is the Fed exacerbating this growth deceleration trend by further interest rate tightening.
The Fed can afford to "skip" at the June meeting. And in my view, further interest rate increases this year are unlikely. This is unequivocally bullish for markets.
There are numerous risks that markets face going forward. But at the moment, inflation is not one of them.
For further details see:
May CPI: Very Bullish As Inflation Recedes As A Macro Threat