In this week’s edition of Steady Investor, we dive into recent market dynamics influenced by significant events, including:
- Core inflation falls to 4.8%
- Low unemployment keeps pressure on the Fed
Core Inflation Falls to 4.8% in June, Still Some Distance from Fed Target – The Labor Department reported some welcome news on inflation last week. The consumer-price index (CPI) measure of inflation rose by 3% in June from a year earlier, a drastic improvement from the 9.1% peak recorded in June 2022. Core CPI, which strips out volatile food and energy Tcategories, rose by 4.8% year-over-year in June, which also registered as a solid improvement from May’s 5.3% print. The headlines largely tout the 3% figure, which makes it seem like the U.S. economy is within striking distance of the Fed’s 2% target. But core CPI matters more to the Fed, since they view food and energy’s contributions as highly volatile and also because they view the core measure as a better predictor of future inflation. As seen in the chart below, for instance, Energy was an outsized driver of the 3% headline figure, which could change considerably from month to month.1
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Source: U.S. Labor Department3
Even still, Fed officials are likely happy with June’s report, since core prices posted their smallest monthly increase (from May to June) in two years. There were many details of the latest inflation report to cheer – consumers paid less for used cars and airline tickets, growth in rent payments has slowed sharply, and the share of small businesses raising prices fell to 29%, the lowest level since March 2021. We have written many times in this space about the ‘shelter component’ of CPI, which measures rents and has a quirky component called owner’s equivalent rent (OER). This component is what homeowners would hypothetically pay to rent their own houses, and it continues to place upward pressure on the headline figure as seen in the chart below:
The Shelter Component of CPI (purple line) Lags the Headline CPI figure (red line)
Source: U.S. Labor Department4
The upshot is that OER tends to lag national home prices, which are no longer being pressured higher (see chart below). If the OER follows national home prices, we should expect its impact on CPI to weaken as well.
S&P Case-Shiller U.S. National Home Price Index
Source: Federal Reserve Bank of St. Louis5
Last Friday’s Jobs Reports Complicates Inflation Optimism – Just days before this week’s inflation announcement, the Labor Department released another report that likely complicates any Fed optimism about falling inflation. It was the June jobs report. While hiring technically slowed from May, U.S. employers are still adding to payrolls at a strong pace. Private employers added 209,000 new workers in June, down from May’s 306,000 but still high by historical standards. The Fed continues to believe that too much strength in the economy and labor markets will cause inflation to be ‘sticky,’ basically complicating the last mile they need to travel to their 2% target. Indeed, employers raised hourly wages by 4.4% year-over-year in June, which is well above the pre-pandemic pace and only adds to inflationary pressures. It’s for this reason that the Fed seems almost certain to raise rates once again at their July 25-56 meeting, even as CPI measures are clearly in a downtrend.6
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Disclosure
1 Wall Street Journal. July 12, 2023. https://www.wsj.com/articles/consumer-price-index-report-june-inflation-ede7f4b1
2 ZIM may amend or rescind the guide “How Much Do You Need to Retire” for any reason and at ZIM’s discretion.
3 U.S. Bureau of Labor Statistics. 2023. https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category.htm
4 U.S. Bureau of Labor Statistics. 2023. https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category.htm
5 Fred Economic Data. June 27, 2023. https://fred.stlouisfed.org/series/CSUSHPINSA#
6 Wall Street Journal. July 7, 2023. https://www.wsj.com/articles/june-jobs-report-unemployment-rate-economy-growth-2023-af4d6547?mod=economy_more_pos3
7 ZIM may amend or rescind the guide “How Much Do You Need to Retire” for any reason and at ZIM’s discretion.
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