About That ‘Soft’ CPI Reading
There's still a long road ahead in the fight against inflation.
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First of all, a "shout out" to Doug Kass who did a commendable job posting several good snippets about inflation and dug into the details a bit on the Wednesday CPI report on his Daily Diary on Thursday.
Among the many good posts, my personal favorite was calling out that the folks formulating the CPI have incorporated that the cost of health insurance across the U.S. fell 12% on a year-over-year basis and was 4% lower than a half decade ago. This while auto insurance was up over 20% across the nation in 2023 and property insurance rates have soared in Florida, California, and many other regions of the nation.
I don’t know what planet government statisticians inhabit, but I am pretty sure it is not the same one as the rest of us do.
Investors seem more enthusiastic about the latest CPI report than I am as they bid up the Dow to over the 40,000 level yesterday for the first time in history before a reversal in the afternoon.
Yes, costs for big ticket durable goods have fallen a bit but services inflation, which is just over 55% of the CPI, is still up more than 5% from the same period a year ago. Which means those that want to buy a used F-150 or a new RV seem to be getting some lower price levels. However, more frequent costs like childcare, auto repairs and eating out are all still increasing at a worrying clip.
With the latest CPI reading in the rearview mirror, futures are now factoring in an approximate 75% chance of a 25bps cut to the Fed Funds rate at the September FOMC meeting. That does seem the most likely direction and I could see another 25bps cut in December. I am not advocating that this is the right course of action in the face of still ‘sticky’ inflation and my baseline economic scenario is still one of Stagflation.
In addition, one or two minor cuts by the central bank are unlikely to do much but marginally lift the prospects of the parts of the economy most impacted by the "higher for longer" narrative that has played out over the past few quarters.
Trepp just reported that delinquency rates for Commercial Mortgage-Backed Securities or CMBS spiked up 40 basis points in April, breaching the 5% level and up from just over 3% a year ago. Delinquency rates on office properties rose 80 basis points and now stand at nearly 7.4%.
Starwood’ s STWD Bernie Sternlicht’s recent warning that the deterioration in the CRE space is going to result in an accelerating number of bank failures in the quarters ahead is likely to turn out to be prescient.
Jamie Dimon, CEO of JPMorgan JPM, also once again warned this week of continuing inflationary forces and that investors appear to be pricing in twice the chances of a "soft landing" than what is warranted. Both billionaires are in what I call the "common sense" camp, and while this is currently a lonely space to occupy, it is a prudent one.
At the time of publication, Bret Jensen had no position in the securities mentioned.
