Lots of attention this morning to CPI inflation headlines. Energy running hot on low inventory levels, used cars continue to drift lower in price, shelter costs a mixed bag. IGNORE ALL OF IT. The thing to focus on is the favorite inflation measure often quoted by Fed chair Powell: core PCE inflation, ex shelter costs. It’s a mouth-full to be sure but if Powell thinks it’s important, we should all think it’s important too. It’s trending lower and not slowly.
The rolling 3-month average of core PCE inflation, ex-shelter is down to just 2.6% annualized. Eighteen months ago, it was almost 8%. The most aggressive Fed rate hiking cycle in history is working/has worked. Don’t be told otherwise. Higher rates and tighter financial conditions do eventually work and inflationary trends are headed lower. Yields went up a little after the CPI data was released this morning but they are back down now. Odds are up slightly that the Fed might hike in November but I think there’s enough here to put the Fed on an extended “pause” with regards to rates and policy.
Powell and the Fed want what we all want: a very small, shallow, silent recession in early 2024. Aggressive rate hikes from here exponentially increase the odds of a harder/harsher landing and Powell and the Fed would rather not be the ones to be blamed for that. I think they are dying to stop hiking rates and probably have for the last time for this cycle.
As the song goes, “every new beginning comes from some other beginning’s end”. I think we’re onto new beginnings with regards to rate hikes and the next economic cycle.
Source: Bloomberg and EISI as of September 13, 2023
Richard Barrett
Chief Investment Officer
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