Used Cars, Rents and Food – CPI Update
The Federal Reserve is expected to maintain the current interest rates in their 5.25% range. Fed funds futures indicate a 94% chance of that happening. The latest market report shows that inflation has been a mixed bag for the US economy. While energy costs and slowing inflation of food products have weighed on headline inflation figures, inflation remained strong in housing and used cars, with increases of 0.5% and 4.4% respectively in May alone. This article will explore these sectors in greater detail.
1) The Housing Sector
Rent inflation eased slightly in May with housing costs only rising by 0.5% from the previous month. While hotels, on the other hand, saw an increase in prices, with out-of-home accommodation rising 1.8% for the month. Overall, housing inflation was the main contributor to the monthly CPI increase.
2) The Used Car Sector
After adjusting for seasonal variations, used car and truck inflation has not slowed at all, as prices rose 4.4% in May alone, and an additional 4.4% in April. Used cars and trucks were the second largest contributor to inflation for the month. Despite a recent drop in used car wholesale prices, buyers have not yet seen a difference.
3) The Food Sector
Groceries rose in May after several months of decline, but only by about 0.1%. Eggs saw the largest drop at 13% for the month, while hog prices were down 0.8% from the previous month.
The Combination Effect
The mixed data is likely to reinforce pre-release biases of investors’ outlook. Experts in the soft landing and hard landing camps both report directional progress should not be confused with mission accomplished. Wells Fargo predicts a more noticeable deceleration of core prices in the coming months.
The Federal Reserve may maintain current interest rates in their 5.25% range for the time being. While some experts expect core CPI to show signs of slowing, others predict that the annualized rate of 3.0% to 3.5% should prevent the FOMC from cutting rates until 2024. However, the latest summary of economic projections is expected to signal that another rate hike is still in the cards.
Additional Piece:
The mixed bag of inflationary data provided by the CPI report in May indicates that some sectors are experiencing growth while others are floundering. This complicates the picture for investors looking to make informed decisions based on the data set. While this can be frustrating, it highlights the need for investors to dig deeper and look at individual sectors instead of relying solely on the big numbers.
The mixed data picture highlights the importance of taking a more comprehensive approach to data analysis that incorporates multiple factors. Investors must go beyond just looking at the numbers and investigate the underlying drivers of these trends. By drilling down, they can better understand why some sectors are experiencing growth and others are floundering.
In the housing sector, for example, while rents have eased slightly and hotel prices have risen, inflation has remained strong in the housing market. This inflation for housing has outpaced increases for food and other essential items in consumers’ budgets. These indicators must be put on a timeline to show whether trends are short- or long-term.
The mixed results are not likely to lead to any significant changes in the Fed’s current stance. However, investors should use this information to assess the risks and opportunities of individual sectors. For example, those who are looking for an investment in the housing sector may need to explore alternatives to traditional residential rental investments, such as co-living spaces.
One such example is Quolity, a company that is pushing the boundaries of co-living spaces. The company provides housing to young adults and early-stage professionals, linking the demand for affordable housing to quality living and real estate, and is creating long-term sustainable investments in new markets.
In conclusion, the mixed bag of inflationary data provided by May’s CPI report indicates that there are both growing and floundering sectors, and this can complicate the picture for investors. However, investors who take a more comprehensive approach to data analysis that incorporates multiple factors can better understand why some sectors are experiencing growth and others are not. These indicators must be put on a timeline to determine short- or long-term trends and help investors assess the risks and opportunities in specific sectors.
—————————————————-
| Article | Link |
|---|---|
| UK Artful Impressions | Premiere Etsy Store |
| Sponsored Content | View |
| 90’s Rock Band Review | View |
| Ted Lasso’s MacBook Guide | View |
| Nature’s Secret to More Energy | View |
| Ancient Recipe for Weight Loss | View |
| MacBook Air i3 vs i5 | View |
| You Need a VPN in 2023 – Liberty Shield | View |
The market has spoken, and it says the Federal Reserve will not raise rates tomorrow.
After May’s inflation numbers came in a bit softer than expected, fed funds futures are priced as if it’s all but certain that the US central bank will hold rates steady in their 5-to-5 range. 5.25%.
(For details: CME’s FedWatch shows futures markets are pricing a 94% chance that US rates will stay in their current range this week, up from 79% yesterday.)
But how much easier has inflation been, exactly? While falling energy costs and slowing food inflation weighed on headline inflation figures, housing and used car inflation remained strong. So it was a bit of a mixed bag, which helps explain why a rally in Treasuries kicked off by the CPI report had run out of steam by midday.
One thing the CPI (and market reaction) shows is that it’s pretty pointless to look at the big numbers without digging into the underlying drivers. So let’s take a look at some individual sectors, using this graph from Wells Fargo:
1) Rents. US rent inflation eased slightly, with housing costs in May rising 0.5% from the previous month (compared to the 0.6% increase in rents in April and 0.5 % For owner equivalent rent). This corresponds to the predictions of economists at Goldman Sachs earlier this week.
Hotels, for their part, saw a significant rise in prices, with out-of-home accommodation rising 1.8% for the month on a seasonally adjusted basis and 2.6% unadjusted.
Overall, housing inflation was the main contributor to the monthly CPI increase.
2) Used cars. Used car and truck inflation hasn’t slowed at all After adjusting for seasonal variations. Prices rose 4.4% in May alone, in line with the 4.4% jump in April. Used cars and trucks were the second biggest contributor to inflation for the month; THE recent drop in used car wholesale prices hasn’t even started showing up for buyers.
Car insurance didn’t help either! It rose 2% seasonally adjusted for the month and 17% in the year ended May.
3) Food. The cost of groceries rose in May after several months of decline, but rose only about 0.1%.
The price of eggs fell 13% (!) for the month, while the supply pressures at the start of the year has eased.
Oh, and hog prices were down 0.8% from the previous month. Looks like the “pig summeris indeed getting started.
Mixed data is “likely to help confirm pre-release biases in investors’ outlook,” says Jefferies economist Thomas Simons:
The soft landing / “immaculate disinflation” camp can indicate deceleration in the stock, deceleration in basic services and the fact that the stock would have been flat if it weren’t for the used cars like signs that the Fed is getting what it wants without having to orchestrate a major slowdown in growth. However, the hard landing camp may point to lower energy prices that won’t be repeated, and continued pressure on prices for housing and basic services as reasons to expect consumers to cut back. their discretionary spending as reason to believe we are already heading into a recession.
We’ve been in the hard landing camp for a while now, and we have no reason to change based on this data. It doesn’t change anything for the Fed either, as it’s very likely to take a break at tomorrow’s meeting, and unlikely to be forced to ride this cycle again.
But really, not much has changed, says Michael Feroli of JPMorgan:
Today’s numbers may be hopeful, especially if you think industry data on rents and supplier delivery indices point to lower rental and property prices. However, this same argument could have been made a few months ago, and so far it’s hard to see much improvement. By our estimates, May’s core PCE looks on track to rise 0.35%, or 4.7% on a year-ago basis, which would be unchanged from April.
And “directional progress should not be confused with mission accomplished,” say Sarah House and Michael Pugliese of Wells Fargo:
We expect a more noticeable deceleration in core prices in the coming months. Housing inflation seems to have peaked and should continue to slow in the second half of the year. The recent surge in used car prices is not sustainable and we expect this category to resume its descent very soon. Excluding used cars, core goods inflation showed signs of slowing amid normalizing supply chains and moderating demand.
[ . . . ] If, as we expect, core CPI continues to grow at an annualized rate of 3.0% to 3.5% in the fourth quarter of this year, this should prevent the FOMC from cutting rates until 2024. In the more immediate future, today’s data should lock in a pause at the June FOMC meeting, meaning no rate hike. However, we expect President Powell’s press conference and the latest summary of economic projections to signal that another rate hike is still in the cards.
https://www.ft.com/content/78db971f-7233-4c24-9e2d-9f4fbdeeee5a
—————————————————-