We’re all tired of the inflation talk by now, but we gotta do it. We promise to keep it quick and painless. 🥴
March’s consumer price index (CPI) came in mixed, though it looked pretty good from just the headlines. Headline inflation rose 0.1% MoM and 5% YoY, both 0.1% lower than the consensus estimate. Meanwhile, core CPI which excludes food and energy, rose 0.4% MoM and 5.6% YoY as expected.
As previous readings have indicated, goods inflation continues to trend lower but services inflation remains sticky. However, analysts continue to argue that core inflation is actually better than it looks on the surface. For example, if you exclude shelter, which rose 0.6% MoM and 8.2% YoY due to the lag in how it’s reported, inflation rose just 3.4% YoY.
Charlie Bilello shared a great chart showing how different CPI components compare from June 2022’s peak to this most recent read. 👇
US CPI has moved down from a peak of 9.1% last June to 5.0% in March.
What's driving that decline? Lower rates of inflation in Gasoline, Fuel Oil, Used Cars, Medical Care, Apparel, Gas Utilities, New Cars, Food at Home, & Electricity. pic.twitter.com/uC6VlAs62Q
— Charlie Bilello (@charliebilello) April 12, 2023
Stocks initially rallied on the news since it likely means the Fed’s May meeting will be its last 25 bp hike before pausing. 🔺
The Bank of Canada kept rates unchanged for its second straight meeting, with other developed-market leaders also pausing their hiking cycles. The consensus view is that rates in many countries are likely high enough. Now the central banks need to wait and assess how these hikes impact their economies. ⏸️
Where the market ran into trouble was the March FOMC Minutes, which came out at 2:00 pm ET. 📝
As WSJ Reporter Nick Timiraos points out, the minutes showed that the Fed’s base case now includes a mild recession starting later this year. Their rationale is that the recent banking sector turmoil will further weigh on the economy. This expectation ran contrary to the stock market’s hopes for a “soft landing” where the Fed could cool inflation without causing a recession. 🛬
FOMC Minutes: "Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year." https://t.co/cCpYF5TbYA
— Nick Timiraos (@NickTimiraos) April 12, 2023
Now, eyes will turn to tomorrow’s producer price index (PPI) release as the market considers the Fed’s next move. 👀