All-important CPI inflation data out this morning, and while the market’s reaction has been favorable since 8:30am EST there’s lots to evaluate here. Has the headline CPI inflation number fallen enough to put the Fed in “pause mode” for the summer? The trend of inflation is declining but inflation itself is still elevated – more hikes to come? The housing component of CPI hasn’t fallen enough but all the rental market data says that rents are falling A LOT. And used car prices strangely rose in the past month– breaking an 8 month trend – why? Too many questions, not enough answers. I am on coffee #3 and my head hurts.
The bigger thing to focus on is this: has substantial progress been made in the Fed’s fight against inflation? The answer is yes. The Fed has taken CPI inflation down from 9% a year ago to roughly 4.3% today. That may not be complete progress but that is substantial progress. And the market agrees. Instead of trying to interpret price data on the fly, another way to think about whether substantial progress has been made is to look to the past. In the past 83 years, there have only been six other times in which CPI inflation data has fallen by at least 5% in a year – we are currently in observation #7.
The data speaks for itself – forward market returns from such substantial progress versus inflation are well above average looking out 6-12 months. #datadontlie
Source: JonesTrading LLC as of June 13, 2023
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