September Rate Cut Uncertain: Examining the Impact of CPI Changes
The latest report for May brought some positive news. In April, the core CPI was +0.29% and the Median CPI was +0.35%, but this month saw improvements with figures of +0.16% for core and +0.25% for the median. This marks the best median CPI print since last summer and the best m/m core CPI print since 2021.
While core goods decelerated to -1.7% from -1.3% y/y, there are concerns about the sustainability of this trend. It’s hard to imagine goods experiencing deflation of a few percent for an extended period. Core services remained steady at +5.3% y/y, indicating a mixed picture in the CPI report.
While some may see this as a positive sign, the data also reveals some challenges. The disinflation observed seems to be primarily driven by goods, with new car prices declining while used car prices rose. Apparel and durable goods also saw declines, along with education and communication commodities.
Medical care, both goods and services, experienced acceleration, with hospital services showing a slight deceleration. Doctors’ services and medicinal drugs saw price increases, while airfares and motor vehicle insurance costs decreased. Despite some positive movements in certain sectors, overall inflation remains a concern.
Rents continue to play a significant role in inflation, with primary rents and owners’ equivalent rent seeing accelerations compared to the previous month. This has led some experts to suggest that inflation is still primarily driven by rents, contrary to previous predictions.
The optimism surrounding core goods and services is tempered by the stickiness of rents and wages. While goods prices have shown some deflation recently, the long-term outlook remains uncertain. Global protectionism and immigration trends also add complexity to the inflation equation.
While the latest CPI report offers some encouraging signs, it is not a definitive indicator of future trends. Investors should exercise caution and avoid making hasty decisions based on one data point. The overall inflation outlook remains in flux, with housing costs expected to fluctuate in the coming months.
In conclusion, while the current CPI report paints a positive picture in some areas, challenges remain. The Federal Reserve may consider a rate cut in the near future, but the overall economic landscape is complex and subject to change. As we navigate these uncertainties, it is essential to maintain a cautious and informed approach to decision-making.