Markets with Megan

The latest Consumer Price Index (CPI) report provides a comprehensive overview of current economic trends, especially regarding inflation. The report suggests a subtle decline in inflation, which, if accurate, could signal relief for both consumers and the markets. However, a deeper analysis reveals a complex situation with persistent challenges that the Federal Reserve must navigate carefully.

Inflation's impact is far-reaching, affecting everything from the cost of groceries to the stability of retirement funds. Understanding these trends is critical for consumers and investors alike. The April CPI report showed year-over-year growth in consumer prices, excluding food and energy, which are known for their volatility. This growth has decreased slightly, which may seem like a positive indicator at first glance.

We see a different story when examining the core components of inflation. The "super core" inflation rate, which strips out the volatile food and energy sectors and focuses on services, is still rising at a concerning rate. This is particularly problematic for the Fed, which aims for a 2% inflation target. Despite a moderate easing on a month-to-month basis, the annualized numbers paint a picture of an inflation rate that's not just stubborn but one that may require the Fed to maintain a stance of higher interest rates for a longer period.

We finally got some good news on inflation today. It is Wednesday, may 15th, and this is your regular segment of Markets with Megan. We're going to discuss today the consumer price index that we've been waiting for for the month of April, and what you're going to read in the headlines is that inflation is coming down. This was a great report. The equity markets loved it and, yes, the equity markets did love this report and the report came in basically as expected. The trajectory is that inflation is coming down, but what we've often said in our market commentary is it's nowhere near where the Fed wants it to go.

So let me dig into some of the details, give you the good points and the bad points. So, from a good perspective, if you take out food and energy, consumer prices grew 3.6% on a year over year basis and that's down from 3.8% last month. So that's good and that's what I think the markets are looking at today. But let's dig a little deeper and I don't want to put poor cold water on this report because, yes, inflation is moving lower. We want to see that. But when you look at the sticky part of it and that's what we focused on a lot when we talk about inflation services, service prices this is still very problematic. What's considered super core inflation? So core inflation excludes food and energy because they're very volatile prices. So it excludes that out. So you can just get a true sense of where the consumer prices are. Well, super core inflation takes the services and takes out that food and energy and that is still rising almost 5% on a year-over-year basis. This is not what the Fed wants to see and in fact it's not moving lower anymore, it's actually moving higher.

Let's talk about some of the things that are a problem in this inflation report. Motor vehicle insurance anybody who's had to re-up their motor vehicle insurance 23% higher than it was this time last year. When you look at some of the other areas, whether it's motor vehicle maintenance and repair, that's up 8% on a year-over-year basis. The owner's equivalent rent is still up close to 6% on a year-over-year basis, but on a monthly basis it is moderating a bit. So that's good news. But when you look at some of these things on a three-month annualized basis and again the headline reports aren't going to tell you this and they're not going to focus on this but the headline CPI on a month-over-month basis, if you annualize that in April is up 4.6% on a three-month annualized basis. That's up from 1.9% in December. When you look at the core CPI on a three month annualized basis, it's rising 4.1%. That compares to 3.3% in December.

So what does all this mean? The markets liked the fact that there was not any major big surprise. So the markets are higher today. Bond yields are lower. That is primarily due to a weak retail sales report. But the equity markets like this.

They're still pricing in Fed rate cuts this year. Still, one, if not the chances of two, is very unlikely. We actually still think that this is pricing interest rate cuts off the table for 2024. There's just simply no way that the Fed's going to have enough confidence at this point to be able to say that, yes, we are firmly getting to our 2% target. We're not going to get there this year. They've said they don't need it to be exactly at 2%. But some of these underlying components of these inflation readings are things the Fed is going to look at and they're going to say we can stay on hold for longer.

I think you'll see some of the rhetoric from the Federal Reserve get pulled back. We are seeing that today with the report that hey, higher for longer Keep that in mind. So we think rate cuts are being pushed into 2025 at this point. That's barring any major calamity when it comes to economic growth, but at this point inflation is just getting too stubborn and kind of stuck here with the progress that has been made. That's all we have today. If you have any comments, questions or feedback, please feel free to reach out to podcasts@verdence. com and we will be back next week with more economic data and insights into the market. Thank you,