Breaking Down the March CPI Report with Key Insights for Investors | Episode 119 | 04-10-2024

Today, Megan gives her take on the much-anticipated CPI report for March.

Megan discusses the surprising inflation trends, challenging the notion of seasonal influences. Despite initial expectations, inflation seems to be holding steady, even showing slight increases, much to the concern of the Federal Reserve.

Key highlights include:

• Analysis of CPI report for March, revealing unexpected inflationary pressures.
• Insights into the sources of inflation beyond energy prices, focusing on housing and service sectors.
• Market reactions to the inflation data, with substantial volatility observed.

Megan also shares expert opinions on:

• The potential impact of inflation on interest rate cuts and Federal Reserve policy.
• Predictions for future market trends and economic outlook.

Stay tuned for a second episode later today, where Megan will provide further analysis based on the latest FOMC minutes.

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Well, it's hard to blame this one on seasonality. This is Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors. We're coming to you today it's Wednesday, April 10th with our regular segment of Markets with Megan, and let's talk about that CPI report. This has been really the much- anticipated report for this whole week. This is inflation for the month of March, and we have gotten some conflicting news reports over the past couple of months on where we truly are headed for inflation. We've got dovish Fed rhetoric, which was, in our opinion, a mistake, but what we're seeing is the first couple of months of the year the hotter than expected. CPI reports were blamed on certain seasonality factors. Well, three months in a row, it's really hard to say that this is just seasonality. Unfortunately, inflation is stuck. It's actually moving slightly higher, not dramatically, but it's stuck, and that is exactly what the Fed does not want.

We have always said that it was very easy to get from those high elevated levels that were due to the supply chain disruptions, all of those factors that happen after the pandemic. That's the easy part to get that goods inflation down. Now we're stuck here where we need to get housing inflation down, wage pressures down and, specifically, service inflation. So let's just dig into this report. This morning the report came in where inflation grew on the headline level four-tenths over the month. It was a little bit hotter than they had expected. On a year over year basis, it was hotter than expected as well. We all know that energy prices have been elevated, but when you strip out those energy prices also, it came in hotter than expected. So where is the inflation coming from? Outside of energy. We're looking at owner's equivalent rent or the housing component. On a year, year-over-year basis, that's growing almost 6%, nowhere near where it needs to get that Fed down to their target range. The other thing that's concerning for us is that service number. When you look at service inflation, it grew five-tenths of a percent last month. It's up 5.3% on a year-over-year basis. This is what we call sticky. This is very difficult for the Fed to control. When it comes to houses, the Fed can't build houses. When it comes to energy, they can't produce energy. And when it comes to services, services go up when wages go up, because wages go up and people can. When services are higher, people can demand more from the wage perspective and it becomes this vicious circle. So what does this mean for the markets Today. Honestly, they hate it. Not surprising Markets are down substantially.

This has been a lot of volatility in the markets around all the inflation information, the rate cut expectations. Let's just go back a couple months when people were anticipated six rate cuts this year as early as March. That was never our base case scenario. We were always second half of the year. Well, now there is the chances of rate cuts is being pushed out into the fall and we're now looking at one, maybe two interest rate cuts priced in for this year. Our opinion on that is we've always been cautious. We've had interest rate cuts priced in for this year. Our opinion on that is we've always been cautious. We've had interest rate cuts in the second half of the year.

If inflation does not get substantially better, there's a chance the Fed could be on hold for the rest of this year. We're not going to make a full judgment yet. You're going to hear people talking about the fact that they may have to even raise rates again. We're not there quite yet either. We still stand in the view that the economy will slow down. The consumer is very stretched. They will slow down spending. We'll get a slowdown in growth. Inflation should start to get back on the right trajectory.

But rate cuts right now this is just not even a topic to be thought of. It was a mistake, in our opinion, that the Federal Reserve got dovish. We have talked about how there's a chance that they can reignite inflation. We're starting to see that and we think that we will start to get some more information from the Federal Reserve that they will start to pull back some of that rhetoric that interest rate cuts are around the horizon or even possible for this year. Now we're going to be back again later this afternoon. We're going to have two markets with Megan's for you today, because later this afternoon we'll get the actual FOMC minutes from their meeting their prior meeting that they had, and that's always important to get a real full picture of what the individual committee members are thinking as far as interest rate cuts and what their concerns are. That's all I have and we'll be back later this afternoon. If you have any questions or comments, please feel free to reach out to podcasts at verdence dot com. Thank you.