Payden & Rygel: Commentary on the latest US Consumer Price Index report

Payden & Rygel: Commentary on the latest US Consumer Price Index report

15 augustus 2024

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The month-to-month change in core CPI was in line with consensus expectations (0.2%). The year-over-year reading also slowed to its softest in more than three years (3.2%), while headline CPI breached 3% for the first time since 2021 (2.9%).

Is it time to start popping champagne? Probably not just yet.

The July report was not as definitively soft as June (maybe the June core reading was an outlier?)

In particular, the shelter component reaccelerated in July (+0.4%) after slowing sharply in June (+0.2%). Rents picked back up to 0.5%. It’s still an open question about where rents and shelter will settle in, but it may have been premature to conclude that the 'shelter stickiness' story was over after June’s soft reading. Bullish bond investors will again be disappointed at the rent index charts they have been drooling over for two years now where the monthly pace of rent growth in Zillow data has been less than CPI data for 24 out of the last 25 months. 

In addition, core non-housing services were also very soft in June but picked up in July to 0.2%. With shelter stickier, all the other services must be very soft month after month to keep the underlying inflation trend in check. Will that happen? We’re not so sure. We expect some payback from airfares and medical care services in the months ahead. 

All that said, based on the data we have so far for July, we can guess at a 0.2% month-to-month core PCE reading for July (the Fed’s preferred gauge) when it is released later this month.  A 0.2% reading in core CPI is probably good enough to convince the Fed to cut, but 25 bps in September seems a lot more reasonable than 50 bps, and it’s NOT a done deal. We still have core PCE, another NFP, and another CPI before the September FOMC meeting in 5 weeks. Lots can change.

The market may slowly be waking up to our perspective. The cleanest read on September is by looking at the October fed funds futures contract. After CPI this morning, the market removed 5 bps of implied easing from the contract, but 34 bps remain (more than 25 but less than 50). 

Beyond September, the lack of need/urgency for substantial rate cuts probably means the bond market is still out of sync with reality (implying a 3.50% fed funds rate by June 2025), ESPECIALLY if we achieve a soft landing.

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