May Consumer Price Index Effect on Consumer Spending | Episode 143 | 06-12-24

In this episode of "Markets with Megan," we dive deep into the June 12th Consumer Price Index (CPI) report and its critical implications for Federal Reserve policy decisions. With inflation metrics closely monitored by market participants, understanding the nuances of this report is essential for grasping the potential directions of bond and equity markets. This blog post provides an in-depth analysis of the CPI report, market reactions, and what it means for future Federal Reserve rate cuts.

The June CPI report reveals a promising picture, marking the lowest month-over-month increase in headline consumer prices since July 2022. This is primarily driven by a significant dip in gasoline prices, which contributed to a flat headline number. Gasoline prices fell sharply, marking the largest decline in five months, which helped to counterbalance inflationary pressures from other sectors. However, core inflation, which excludes volatile food and energy prices, remains slightly above the Federal Reserve's target, registering a 0.2% increase month-over-month.

Despite these encouraging signs, core inflation's persistence above the Fed's target raises questions about the pace and timing of potential rate cuts. The Federal Reserve's meeting later today will be closely watched for insights into their policy stance. The core inflation rate, at 3.4% year-over-year, suggests that inflationary pressures are still present, particularly in areas like shelter prices, which have remained stubbornly high. Shelter costs, which encompass housing expenses, have risen by 5.4% over the past year, highlighting a significant challenge for the Fed in managing inflation expectations.

The market's response to the CPI report has been notably optimistic. Bond yields have dropped significantly, with the two-year yield down by 17 basis points and the ten-year yield down by 13 basis points. This reflects increased expectations for potential rate cuts by September, with the futures market now pricing in a 75% chance of a rate cut. Equity markets have also reacted positively, with significant gains as investors anticipate a more accommodative monetary policy stance.

It's going to be a double dose of Markets with Megan today. It is Wednesday, june the 12th, and we have two big marketing movie events today. I'm going to start this morning and then we'll be back later this afternoon with another podcast, but this morning we got the monthly Consumer Price Index report. So this is the inflation report. Why is it important today? Because this afternoon the Federal Reserve meets and it's going to set interest rate policy and also give us updated dot plots is going to set interest rate policy and also give us updated dot plots on where they see interest rate policy going the remainder of this year and in 2025. But let's break down first of all the CPI report, because the markets are definitely moving on this today.

The report came in a little bit better than expected, so it was the lowest level on a month over month basis that our headline consumer prices were basically flat. It was the lowest level since July of 2022. If you look at the core level so this is going to exclude food and energy that was up two tenths. The expectation was for it to be up three tenths and that was the lowest in seven months On a year-over-year basis. We're still running above the Fed's target. The headline is up 3.3% and the core is up 3.4%. So let's dig into the details within that report. Big drop in gasoline prices for the month. That was the biggest month we've seen in gasoline price decline in five months. So that had a lot to do with the headline being flat and when you exclude that out, the core was slightly higher. And that was driven by the fact that we're still having sticky shelter prices, that's housing inflation that remains relatively elevated, rising for 5.4 percent over the past year, where we saw some other declines though apparel vehicles and then airline fares. So again you're seeing some deflation or disinflation in some areas that are very discretionary. So that is things like apparel, it's things like travel. This is a good sign for the Fed. It shows us the consumer is strained and that they are reducing the spending and that's why these prices are dropping. What does it mean for the markets? And we'll see what the Fed says today. So the equity markets are up on this. They were up very big when this was first announced. We've seen bond yields actually plunge on this report as well. The two-year yield is down 17 basis points just today thus far alone, and the 10-year is down 13 basis points. The futures market has pulled the chance for a Fed rate cut to be in September. It's now 75% chance that they'll cut rates in September. It'll be very interesting to see what the Fed has to say this afternoon, so we'll come back with another podcast. This is good news. Inflation is moving in the right direction. The bigger question is is it moving fast enough for the Fed that they can cut rates? We're not so sure about that yet. And what will they say about these sticky prices that we're seeing specifically in, like I mentioned, housing? This is one of those areas the Fed has been concerned about. So we'll be back this afternoon with some more information from what the Fed has to say about this and where we see interest rates going from here. Thanks again. If you have any questions or comments, please feel free to reach out to podcasts at Verdence. com. Thank you.