INSIGHTS

On April 17, 2023

Comforting CPI Print for the Fed

Headline inflation continued its downward momentum, slowing to 5.0% year-over-year in March, down from 6% in February, its lowest level since September 2021. Core inflation ticked up to 5.6%, led by continued strength in the shelter category.

Core services categories are still peaking

In the April 12 report, core services continued to run relatively strong, with shelter once again the largest contributor. Other categories with large increases included air fares (17.7% year-on-year) and motor vehicle insurance (15%). Importantly, however, the Federal Reserve’s (Fed) closely watched “supercore” category (services excluding shelter) decelerated from 6.1% to 5.8%.

Figure 1: Most areas have been cooling, but we would like to see more deceleration in core services (% year-on-year)

Source: Bureau of Labor Statistics, April 2023. CPI is the Consumer Price Index.

Energy inflation fell the most, but OPEC (The Organization of Petroleum Exporting Countries) production cuts pose a risk

Energy CPI (Consumer Price Index) was the largest negative contributor this month, primarily driven by base effects and warmer weather. Over the medium-term, however, this trend may be upended as OPEC+* unexpectedly announced further production cuts of over 1.5 million barrels per day, in addition to the cut of two million barrels announced in November 2022.

Labor market indicates a wage-price spiral could be less likely

There are finally signs that the Fed’s policy is loosening labor market conditions. For example, job openings fell to the lowest level since May 2021, and the pace of job creation has moderated over several months. This has had a knock-on effect on wage growth, which has been running at the slowest level since June 2021. Momentum, measured by the three-month annualized rate, has also been slowing (Figure 3).

Figure 3: A wage-price spiral could be less likely

Source: NFIB small business survey, March 2023. https://www.nfib.com/surveys/small-business-economic-trends/

Goods prices have continued to slow or reverse

The start of the pandemic was marked by price declines until consumers adapted to the new reality and supply-chain disruptions led to major spikes in goods prices. Lately though, some of those areas have reversed course, leaving services categories in focus (Figure 4).

Since January 2020, the CPI has risen by 16%, led by autos (due to semiconductor shortages and logistics disruptions), food prices (labor shortages, higher fertilizer prices), and energy categories. We expect further relief in some of these areas.

Figure 4: Many areas with the strongest price rises have reversed lately

Source: Bureau of Labor Statistics, April 2023

An encouraging report for the Fed, but its job is not quite done

Overall, CPI inflation has continued to move in the right direction, and recent developments in the labor market look encouraging, although energy prices remain a risk.

For now, we expect the Fed to raise the policy rate one more time at its next meeting in May and then hold it steady to allow for the lagged effects of its hikes to work through the real economy.

CRN: 2023-0414-10804 R

The opinions and views of this commentary are that of Insight Investment and are not necessarily that of Advisors Asset Management. 

* OPEC stands for the Organization of the Petroleum Exporting Countries. OPEC+ nations include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan.

The Consumer Price Index (CPI) is released by the Bureau of Labor Statistics as a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Any forecasts or opinions expressed herein are Insight Investment's own as of April 12, 2023 and are subject to change without notice. This information may contain, include or is based upon forward-looking statements. Past performance is not indicative of future results.