Leland Abrams, who serves as Chief Investment Officer for the investment manager Wynkoop LLC and a portfolio manager of a fixed income fund at Catalyst, provides his analysis of the July 12 consumer price index (CPI) data release:
In our Catalyst Insights piece from last month, we predicted the headline CPI number to fall to around 3% year-over-year for June. This is exactly where it came in.
Most important in today’s data release was the core CPI coming in rounded up at 0.2%, but the actual number was lower at 0.16%. As we’ve discussed before, the supercore, which excludes housing (we’ve written about the very lagged effects of that data and hence it has been overstating actual progress on rents and home prices), came in at 0% MoM. The Fed is most concerned with services inflation ex-housing.
Core services came in at +0.09% MoM, rent -0.46%, airfares -8.0%, used cars -0.5%, hotels -2.0%, leaving the only significant strength in auto insurance.
Manheim Auction data now indicates three months of significant price drops in wholesale used cars (the worst since the start of the pandemic), which will continue to feed negative numbers to the core CPI reading for several months to come.
Inflation is in the rearview mirror and we’re not sure why the Fed is hellbent on fighting phantom inflation in terms of backward-looking data…or perhaps they are just jawboning to keep rates high for as long as possible before their hand is shown. The focus now should shift to economic growth (or lack thereof) as inflation has all but been defeated!
On the heels of the benign data, bonds are rallying across the curve, led by the front end and belly (bull-steepener).