A thoughtful reader thinks the month-over-month CPI and PCE comparisons are too difficult for a Fed rate cut in July. Let’s investigate the claim.
Chart Notes
- The Consumer Price Index Numbers (CPI) are from the BLS.
- OER stands for Owners’ Equivalent Rent. It is the price someone who owns their own home would pay if instead they rented.
- PCE stands tor Personal Consumption Expenditures. The PCE price index is the Fed’s favorite measure of inflation.
- The CPI overweighs shelter vs the PCE.
- I calculated these numbers to two decimal places. The BLS and BEA round to a single decimal place.
OER is the single largest component of the CPI with a weight of 26.64 percent. Rent has a weight of 7.62 percent, and the broader shelter index has a weight of 36.16 percent.
Understanding My Reader’s Claim
The year-over-year CPI and PCE for May will decline if the May month-over-month numbers are lower than the May numbers a year ago.
But will the Fed focus on core numbers or the overall numbers?
The core numbers exclude food and energy.
Numbers to Beat
- PCE: 0.11 Percent
- Core PCE: 0.29 Percent
- CPI: 0.11 Percent
- Core CPI: 0.36 Percent
- CPI Rent: 0.52 Percent
- CPI OER: 0.53 Percent
I agree with my reader that the base CPI and PCE numbers will be extremely difficult to beat. This is why he thinks I am two month’s early
But the Fed will watch the core numbers more closely. And the CPI core numbers will depend on OER and Rent.
I think the Fed will be happy with a big improvement in either the core CPI or core PCE. This also depends on the next two jobs reports and the unemployment rate.
Rent and OER
Rent has gone up at least 0.4 percent for 32 months.
For discussion, please see my May 15, 2024 post CPI Up 0.3 Percent With Rent Still Rising Steeply, Food a Bright Spot
Yet Another Groundhog Day for Rent
Rent of primary residence, the cost that best equates to the rent people pay, jumped another 0.4 percent in April. Rent of primary residence has gone up at least 0.4 percent for 32 consecutive months! [So has OER]
The “rents are falling” (or soon will) projections have been based on the price of new leases and cherry picked markets. But existing leases, much more important, keep rising.
Only 8 to 9 percent of renters move each year. It’s been a huge mistake thinking new leases and finished construction would drive rent prices.
Most leases renew in May through August. I expect rent to moderate soon.
That last line above is the key one. I finally think we see a drop in the rate of increase in rent and OER. If not in May, then June.
But the Fed’s decision will also depend on the Jobs reports for the next two months as well as economic data in general.
Expect a Fed Rate Cut in July
For further discussion, please see I expect a Fed Rate Cut in July Despite Market View of 18.5 Percent Chance
At the risk of looking silly, I think the market is wrong about the odds of a Fed rate cut in July. What Will It Take?
To cut rates, the Fed will need some combination of weak jobs, rising unemployment, and improving year-over-year inflation.
My reader could be correct. If there is no rate cut in July, then look for one in September.
A week ago, the probability of a rate cut in September was only 46.9 percent. Now it’s up to 70.6 percent!
A Second-Quarter Recession This Year Looks Increasingly Likely
This morning I commented A Second-Quarter Recession This Year Looks Increasingly Likely
As I watch the evolution of consumer spending, housing starts, new home sales, and GDPNow trends, it appears the economy has peaked.
In the above link, I outline numerous ways the economy is weakening.
My bet is the jobs reports will be tame and/or that there will be enough improvement in OER and rent to support a rate cut.
There is an additional wild card. The Fed will make excuses to do whatever it wants to do.
If the Fed is looking to cut rates before the election, there are only two realistic chances, July and September. There are no Fed meetings in August or October.
Biden isn’t going to allow bad numbers to come out as this would confirm bidenomics isn’t working. They’ll do what they have been doing- release good data and revise lower later.
That America is mired in a crisis of competence appears to be yet another issue that can’t be addressed directly as it might upset the narrative control that all is well and everything is getting better in every way, every day.
And so we sugarcoat the incompetence, the endless delays, the sclerosis and the decline in quality and functionality as if these are all signs of rude, vibrant health rather than signs of systemic decline and decay.
Relatively straightforward infrastructure projects now face years or even a decade of delays / zero real-world progress. I can name several projects in my county where the environmental impact studies and various governmental reports have consumed six years, during which the harbor remains closed, the roads are unpaved gravel, the park is closed and the bridge is awaiting repairs.
When the public rightly complains of years of inaction and foot-dragging, local officials throw up their hands in frustration as all the necessary approvals and funding must wind their way through the impenetrable thickets of state and federal agencies, a leisurely process over which they have no control.
As for the private sector, I’ve often detailed the immense, systemic decline in the quality of everything from the ingredients in packaged food to “stainless steel”, as well as the equally immense burden of unpaid “shadow work” demanded of us all just to manage the complexity thickets generated by “progress.”
https://charleshughsmith.substack.com/p/our-crisis-of-competence/
The reason for this is:
SEE PAGE 59 – THE PERFECTSTORM : The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy. But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel https://ftalphaville-cdn.ft.com/wp-content/uploads/2013/01/Perfect-Storm-LR.pdf
Other than hoping to boost Biden (the media would proclaim that the worst is over, blah blah blah), the strongest argument for a Fed rate cut than I can see right now is that the Canadians and EU look like they are getting ready to cut theirs. I doubt the Fed wants the dollar to be THAT strong. Or maybe the economy is weaker than I think it is.
i respectfully disagree.
watching BoC & ECB cut rates while the FFR remains @ 5% is precisely Powell’s plan/intent.
Powell is breaking the euroDollar system & repatriating $USD monetary policy. Powell is NOT on the same team w/ LeGarde, Yellen, City of London, BIS, etc.
Powell is breaking the euroDollar system & repatriating $USD monetary policy
I don’t understand this. Please elaborate. My belief is that the Fed does not want the dollar to be strong enough to further undermine the U.S. world trade position.
There is an aspect of this not much in public domain.
Powell has come out and said that Federal deficits are not sustainable.
In effect while Fed was tightening policy to combat inflation Congress and Administration were spending profligately.
For the US to curtail reliance on borrowing to fund spending there must be a major reinvestment incentive to get USD’s parked overseas to come back to US soil.
Higher yields is the way to get that money back onshore.
For both National security reasons (retaining primary reserve currency status) and the ongoing need to fund Government in a sustainable manner(Rebuilding US productivity with repatriated monies which lessens debt assumption for private Companies).
There is a Bull case for USD to be made and accompanying that will be reluctance to lower rates without a significant economic setback happening first..
Has Powell actually had that moment of epiphany as of yet?
Will possibly have that answer soon enough with next Fed meeting.
Has this idea reached the US Senate? Possibly, as former Democrat
Senators Sinema, Manchin and Menendez have become independents.
Choosing country over Party.
Menendez via his current legal troubles may just be a middle finger to democrat party leadership, but Manchin is a Big deal.
When FED cuts run for the hills. House of cards, magical monetary theory.
Inflation is firmly entrenched and the “economy” is clearly overheated despite people’s “mood” on the matter. There are still five job openings for every four available workers, and the government is still creating 6.3 percent of GDP in debt each year that gets dumped into the “economy” in addion to the “normal” already huge levels of yearly government spending.
Great points. If I had to pick one data point right now as a recession indicator, it’d be consumer credit. Credit card defaults and transition into delinquency looks pretty stressed. The low end consumer has clearly been fatigued, probably since the beginning of the year. When the credit card juice dries up, the last line of defense is gone. That’s the kind of dry that can be self fulfilling, pushing economic contraction further.
One last point on CPI comps, I believe auto insurance accounted for a whopping 0.65% of the April y-o-y increase. There is a lot more to that inflation than vehicle prices, but the declines in new and used autos will surely help offset future insurance cost increases. That area may soon alleviate in the new inflation reports.
[1D] DIA is far below May high. DIA doesn’t care about the mag 7. [1W] DIA, If June 3(C) < May 6(C), DIA might be trouble. [1M] DIA is trading under Feb(C). May is a trigger. If June(C) < Feb(C) bad things can happen. If June(C) > Feb(C) ==> no harm is done.
Mish : u might be right. The Fed might preempt the unknown.
[1M] SPY, if June is an upthrust and July (C) < Mar (C) the Fed might cut rates a little to preempt the unknown,
When you are dealing with bogus measures of “real inflation,” what difference does it make?
Until the PCE/CPI/PPI are at 0, there should be NO TALK of rate cuts and rates should keep going higher.
Over 100% compounded inflation over the last 4 years must stop completely
I personally want violent and deep deflation and believe the ONLY proper course is to reverse back via deflation to 2019 price levels in order to get “healthy” and right the wrongs of the Federal Reserve and their criminal accomplices
We can discuss what the Fed should do and what the Fed will do. This post is on the latter.
True
Higher rates will crush a whole generation that can’t afford to own a home. “Violent and deep deflation” is another term for depression. Is this the solution?
The higher rates aren’t what’s killing them. It’s the higher prices driven by the FHFA conforming loan limit. Cut that conforming loan limit by 33%, and home prices would fall by at least 10%, and probably more than that.
It’s not the conforming limit driving home prices. It’s the crimped home supply due to all the people who don’t want to give up the 2.875% mortgage rate they got during Covid. Stupid-ass government overdid it with free money and ultra-suppressed interest rates.
Bullshit. Agency backed securities are 88% of the mortgage market. If you cut the FHFA conforming loan limit by 33%, maybe 45% of the 88% figure would be backstopped by private lenders, but that would still leave 48% of the mortgages wanting for a buyer (meaning the loan never gets originated), which would reduce sales, i.e. increase inventory, pushing down prices by at least 10%. Agency backed mortgages currently account for essentially all of the mortgage market, so setting the conforming loan limit sets the price of homes, whether the limit is adjusted upwards or downwards.
PS I agree with you about stupid ass government. And the current Fed had no idea of why price stability was part of its stated mandate. Well, F-around and find out.
It wasn’t the rates that ruined home buying for a whole generation. It was ZIRP and 100% to 400% massively bubbled home PRICES that did that. It’s fuking criminal what the FED did
Except… the powers that be don’t care what YOU want. They care what they want.