Commentary Directory

Another Hot CPI Report is Likely to Push Back Rate Cuts

Jacob Hess
April 10, 2024

The March CPI report felt like it was a bit more important than usual as many were starting to doubt the continuation of the trend of disinflation that was seen in the final quarter of 2023. After the release of the data, those doubts have only intensified. CPI grew 0.4% MoM and 3.5% YoY in March, beating expectations of 0.3% MoM and 3.4% YoY and reflecting a slight acceleration in consumer prices from February's annual rate of 3.2% YoY. The MoM rate of 0.4% is the second straight increase of the pace and faster than the growth observed in the October 2023 to January 2024 when the disinflationary trend was strongest. With March data now in, we see that CPI grew 1.1% QoQ in Q1 2024, much faster than 0.5% QoQ in Q4 2023 and the fastest since 2.6% QoQ in Q2 2022.

Core CPI inflation, at 0.4% MoM and 3.8% YoY, saw a similar trend in that it saw a gentle acceleration in the annual rate and both the monthly and annual increases were higher than expected. The 0.4% MoM increase is the third in a row and a noticeable acceleration over the MoM rates at the end of 2023. We can see that near-term inflationary pressures have gotten worse in this less volatile segment in the quarterly rates just like we saw when including food and energy. In Q1 2024, core CPI grew 1.1% QoQ, up from 0.8% QoQ in Q4 2023 and the fastest since Q1 2023. The evidence continues to build against disinflation.

Let's look at some of the details that stuck out:

  • Food inflation looks to have more or less returned back to the 2% target. Food prices were up just 0.1% MoM in March after being flat in February and the annual rate is now 2.2%. Food at home prices were flat for the second month in a row, and while that doesn't help the absolute level of food prices, it does provide some relief to consumers who felt like grocery store prices were getting away from them. Food away from home is hotter, up 4.2% YoY and averaging growth of about 0.3% MoM in Q1 2024. That still seems linked to services supremacy.
  • Energy CPI had been deflationary some time but is not back up to growing around 2% on an annual basis after two strong increases in February and March. The gasoline and electricity indexes were up 1.7% MoM and 0.9% MoM respectively, and the natural gas index was unchanged. Based on current trends in commodities, it looks like energy prices will continue on a gradual incline which will have a significant impact on the headline rate.
  • The shelter index increased another 0.4% MoM with both rent and owners' equivalent rent increasing at that same rate. Though growth has downshifted, the increase in the shelter index remains the largest factor in the core CPI MoM gain. This index continues to be discounted for its lagging nature. When disregarding it, core CPI is up 0.3% MoM and is much closer to the Fed's inflation target on an annual basis at 2.4% YoY (however, this is up from 2.2% YoY in February). Using an alternate shelter index from Zillow/ApartmentList data puts core CPI at around 1.8% YoY.
  • The transportation services subcomponent is being singled out for its rapid rise in the last three months where it averaged monthly growth of 1.3%. The annual growth of this index, which has a relative importance of about 6.39 ppts, is 10.7%. Under the hood, we see spikes in motor vehicle insurance (up 2.6% MoM and 22.2% YoY) and motor vehicle maintenance (up 1.7% MoM and 8.2% YoY) that are driving transport services prices higher and in turn leading to stickiness in services inflation which is stuck over five percent on an annual basis at 5.4% YoY.
  • While services is hot, goods is cool. Excluding energy commodities, goods CPI contracted in March at -0.2% MoM and is down -0.7% YoY with new and used vehicles dragging the index lower. Apparel did print its second hot MoM rate in a row (0.6% MoM in February and 0.7% MoM in March), and medical care commodities are up 2.5% YoY, but in general, we continue to see goods in disinflation.
  • If we do some more excluding from core CPI of shelter which is considered lagging and of used cars which has been volatile over the last two years, we see that Supercore CPI (ex-energy, food, shelter, used cars) was up 0.4% MoM and 2.6% YoY in March, an acceleration from 2.4% YoY in February. To zero in on core short-term inflationary pressures, we can look at the 3Mo3M% annualized rate. It now sits at 4.4% after a few consecutive hot readings, and this is the highest since February 2023 when it was at 4.1%.

The reaction to the hot report was more pronounced than usual. Treasury yields shot up after the CPI release with many rates reaching the highest level of 2024. Major index futures all sold off by about a full percentage point and are trending that way so far in morning trading. The Russell 2000 was down almost -3% at the morning low. It appeared that the March CPI report seems to have struck a nerve in particular. The newest data suggests that the Fed will have to admit that it can't cut three times this year or at least that June and maybe July are off the table. At the very least, the market believes that FOMC members have to back down as many speakers said they would if the disinflationary trend subsides. Also following the CPI release, the probability of a June rate cut according the CME's FedWatch was crushed down to 21.1% today when yesterday it was at 56.1%. This is a consequence of the Fed insisting on being data-dependent. When the data moves, the market responds to it. And that limits the Fed's flexibility.