Core CPI Inflation Falls Modestly, Supporting Fed Pause

Core CPI Inflation - Redbook Same Store Sales Improve Slightly

Core CPI Inflation - Redbook same store sales growth was much quicker than retail sales growth in December and January. Investors are interested in seeing if this relationship continues.

This would imply retail sales growth being weaker in February since Redbook sales growth fell. I don’t think that’s likely because Redbook sales were weaker in January than December. Yet retail sales were weaker in December than January.

Either way, I’m still concerned with the decline in Redbook sales growth. Good news from the latest report is yearly growth improved from 4.2% to 4.4%. Last week’s report was the slowest in 10 months.

Month to date sales were down 0.3% which is the 9th straight negative weekly reading. The full month year over year growth rate fell to 4.4% which is the slowest growth rate since September.

Core CPI Inflation - Headline CPI Meets & Core CPI Misses Estimates

It’s no surprise that February headline CPI was near expectations. This report rarely has wide deviations from the consensus.

You could have had the same estimate for yearly core CPI for the past 11 months and gotten the result almost correct or perfectly correct. It was in between 2.1% and 2.3% in that period.

Month over month headline inflation was 0.2% which met estimates and was up from the 0% change in January. Year over year headline CPI was 1.5% as you can see from the chart below; this met estimates.

As you can see from the breakdown, housing is a major portion of CPI as it accounts for 42.2% of it. Food and beverage inflation was modest in 2018 which helped the index stay low.

The most important inflation metric is core inflation as the Fed, in theory, is supposed to cut rates if it thinks core inflation will be below 2% and raise rates if it expects it to be above 2% all else being equal.

Core CPI Inflation - was 0.1% monthly which missed estimates and last month’s reading

Both were 0.2%. Since this reading rarely misses estimates, the unrounded miss was fairly large as unrounded monthly core CPI was 0.11047%. Year over year core CPI was 2.1% which missed estimates and last month’s reading which both were 2.2%. On an unrounded basis, this shows the same thing as it was 2.08361%.

Yearly core CPI fell by about 6.5 basis points sequentially. It was the weakest reading since February 2018. Since January and February core CPI were almost exactly the same, the sequential decline in the 2 year stack was almost the same.

Investors are very interested to see next month’s CPI report. Core CPI increased from 1.83% to 2.1% in March 2018. I expect core CPI to fall below 2%, supporting the Fed’s rate hike pause. There already was almost no chance the Fed would hike rates in 2019 before this CPI report came out.

Core CPI Inflation - Fed Funds Futures Market Update

This report makes the chances of a rate cut this year increase modestly in my opinion. For the March meeting in 7 days, there is a 1.3% chance of a cut and a 98.7% chance of no change.

The most important part of the meeting will be rate hike guidance; the 2nd most important part will be the details on the timing of the end of QT. I expect it to end when the assets on the balance sheet are about $3.5 trillion. Now the Fed funds futures market shows there is no chance of a hike this year. There is a 19% chance the Fed cuts rates.

Core CPI Inflation - Economy isn’t doing great and inflation is falling.

Stocks have had a great year. The unemployment rate is low, and the labor market is near full employment. The 2 year yield is nearly at the Fed funds rate. Those are all aspects the Fed will consider when setting policy.

Luckily, there’s very little chance of a recession. Ao the Fed can probably get away with not cutting rates. I’m basing that projection on the ECRI leading index’s yearly growth improvement, the positive impact from the fiscal stimulus, and the lack of a full yield curve inversion. To me this looks like a slowdown that will end in late-2019.

Core CPI Inflation - Specifics Of The Report

On a non-seasonally adjusted basis, food prices were up 2%. That was the highest inflation since April 2015. Food inflation was driven by food away from home as prices were up 2.9%; food at home inflation was only 1.2%.

Limited service meals and snacks inflation was 3%. Energy prices fell 5%. Energy commodities inflation was -8.6% and energy services inflation was -0.6%. Commodities inflation excluding food and energy commodities was only 0.1%. Services inflation without energy services was 2.7%. That makes sense because wage growth has been strong.

In the commodities section, tobacco and smoking products had the highest inflation as it was 3.7%. Cigarette companies raise prices to make up for declining unit sales. Governments raise tobacco taxes to make up for budget deficits.

The big demand boost in this segment comes from vaping, with JUUL being the dominant player in this industry. Medical care commodities and apparel both saw declines as their prices fell 1.1% and 0.8%.

Core CPI Inflation - A look at services inflation without energy services

Shelter inflation was 3.4% as you can see from the chart below. On a monthly basis, shelter inflation was 0.2%. Homeowners’ equivalent rent and renters expenses were up 0.3%. Lodging away from home inflation was 1.3% monthly.

On a yearly basis, medical care services inflation was 2.4%, and transportation services inflation was 1.1%.

Core CPI Inflation - Conclusion

This article included 2 positives for the stock market. Redbook same store sales growth improved modestly which is great because it had been falling most of the year.

Secondly, core inflation fell modestly which means the Fed has even less pressure to hike rates. The comps will start getting tougher in March, which means we may not see core CPI above 2% for a while. If the Fed was forced hike rates, there would probably be a recession.

Even though housing price growth has slowed in the past few months, yearly shelter inflation was up from 3.2% to 3.4%.  

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