May US CPI

Christopher Bowlby - Jun 12, 2024
May’s CPI delivered a rare downside surprise that the Federal Reserve has been waiting for in Q4, as both headline and core measures came in lower than expected.

May’s CPI delivered a rare downside surprise that the Federal Reserve has been waiting for in Q4, as both headline and core measures came in lower than expected. Headline inflation was up less than 0.1% and came in at 3.3% on a year-over-year measure. The surprise on headline inflation was driven by a 3.6% drop in gasoline prices. Overall, headline inflation still remains stuck in a range well above the Federal Reserve’s 2% target, but the progress on core and supercore inflation keeps the door open for 2 to 3 cuts in 2024.

Source: Bloomberg

For core inflation, the measure rose 0.2% in May, below the 0.3% estimate, which pulled the year-over-year figure down to 3.4% from 3.6% in April. This is the lowest core CPI year-over-year since April 2021 when inflation was first heating up as we started coming out of lockdown.

Source: Bloomberg

The largest contributor to core inflation recently has been the shelter component, and this trend continued in May, which saw it increase by 0.4%. Despite this increase, shelter inflation marked its lowest reading since April 2022, and rent inflation marked its lowest reading since May 2022. Shelter is both one of the most sensitive components to monetary policy changes and also one of the most important factors in US inflation data. Over the last year, shelter has made up over two-thirds of the year-over-year core inflation figure.

As we have mentioned in previous newsletters, the real-time data from companies like Redfin have shown that the Bureau of Labour and Statistics’ rent inflation data is operating at a five to six-month lag to the live data. Looking at the comparison between the two data sets, we expect continued tailwinds from shelter inflation over the coming months.

Finally, Supercore Inflation, core inflation excluding shelter, actually saw a decrease of 0.04% for the month of May. This was the first negative reading since September 2021, but on a year-over-year basis still sits above 5%.

Source: Bloomberg

Finally, one factor our team is monitoring is that CPI has had a high correlation with M2 money supply on a 16-month lag. We have started to see a tick up of M2 in the second half of 2023 and throughout 2024. With the Federal Reserve slowing the amount of balance sheet reduction at their last meeting, the Federal Reserve will be increasing the amount of money supply by slowing the pace of balance sheet reduction. This is a trend we will continue to monitor as a leading economic indicator.

Source: Bloomberg