Some data points can be easily summarized. This morning's CPI report is not one of them. The data tell a few different stories depending on how you look at them; the market struggled initially to make up its mind, but is now seizing on the hawkish interpretation. Here's the full story:
1) The headline numbers were higher than expected. CPI rose 6.4% year-on-year, which is better than the 9% peak last summer, but still hotter than expected. Same story for the core, ex-food and energy; up 5.6% in January. A lot of frustration over the fact that the Fed has been hiking for a year now, and inflation is still this high; it's why bond yields rose initially, although they've already retreated somewhat.
2) The "super-core" number cooled substantially last month. Why would people care about services inflation ex-housing? Because it tries to tell us how much the tight labor market is continuing to feed broader inflationary pressures, versus the one-off pandemic spike in things like goods and real estate. This measure rose only 0.36% last month, versus a half percent gain in December. Which means the annualized rate fell from 6% to nearly 4%, a big difference to the Fed.
"The Fed will see more evidence accumulating that inflation is decelerating despite a stronger than anticipated labor market," wrote Morgan Stanley economists after the report. They think rate hikes will cease after May, with a slowing labor market setting the stage "for a stop in the tightening cycle and an eventual first rate cut in December."
3) "Real" earnings still aren't keeping up. Real hourly earnings, meaning after inflation, fell 1.8% year-on-year last month, which was worse than 1.6% drop in December. So if you feel like your income is being gobbled up by higher prices, that's correct. Personally, I notice the sticker shock moving from the grocery store and gas pump, to services that unfortunately can be much costlier to begin with. I don't even want to tell you what my local suburban preschool is charging for full-day care next year--okay fine, it's more than $14,000. That's what college used to cost when I was growing up. Parents are complaining, but the school says it hadn't raised prices since 2019 because of the pandemic, and now it has to play catch-up.
I also notice higher accountant fees, extra surcharges at the doctor's office, and so on. These can be harder to substitute away from than, say, chicken or eggs; and they were later to arrive because they are driven by labor shortages more than supply-chain issues. And while the headline jobs data are mostly still strong, markets and leading indicators continue to suggest a slowdown is coming.
All told, "a lot of the inflation we see is in the rear view mirror, and the road ahead looks better," as Chris Rupkey of FWDBONDS told clients this morning. The biggest risk, however, is that the Fed overtightens in response to that "rear view" inflation story--which, if anything, now looks more likely after today's CPI report.
See you at 1 p.m!
Kelly
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