The Bureau of Labor Statistics will release April CPI data on Wednesday. Consensus calls for an increase of 0.3% in core CPI and 0.4% in headline inflation for the month, corresponding to 3.4% and 3.6% growth year-over-year, respectively. While inflation has been stubbornly high this year and well above expectations, recent broad economic data has surprised to the downside.
Core PCE remains the most popular inflation measure cited by the Fed. The table below shows each key underlying inflation measure and translates it to a target that would be equivalent to a 2% core PCE level. While inflation rates have fallen significantly versus this time last year, all the measures on the dashboard remain red and well above the Fed’s inflation target. By any measure, inflation remains too high.
Bond yields rose last month in response to higher-than-expected CPI prints; however, they reversed course after April’s weak employment numbers and the FOMC’s May 1st meeting, when Fed Chair Powell essentially ruled out rate hikes this year. We believe there has been no indication of the possibility for rate hikes due to the FOMC’s change in focus on financial stability, rather than fighting inflation. “Data dependency" in this FOMC framework means that for a given data release, the change will be along the dimension of when the FOMC will decide to cut rates, not if the FOMC will change its policy stance to include potential rate hikes. Until the risk of rate hikes truly materializes, the distribution of outcomes for interest rates remains skewed to the downside, and more cuts will be priced in if growth and inflation weaken.
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