Reasons for the rally on US CPI data according to Vontobel

Expected to be published on Wednesday. CPI data for April in the United States, The actual number was in line with the consensus forecast. Both the headline and core CPI were up 0.4%m/m, and the y/y figures at 4.9% and 5.5% respectively. While we think the month-to-month figures are still too high for the Federal Reserve to celebrate a victory in the long, uneasy battle against inflation, some of the trends and details in the report are encouraging.

The housing component (which includes owner equivalent rent) continues to decline at a significant rate. Specifically, the month-on-month level was 0.8% in February, 0.6% in March and 0.4% in April. Meanwhile, at a year-on-year level, this component, which represents 34.5% of the shopping basket, remained at 8.1% and shows signs of peaking rather than declining. However, the annualized 0.4% in April equates to a monthly 4.8% and, if this 0.4% month-on-month remains at these levels, the inflation figure will fall by just over one percentage point.

However, it should be noted that given its strong correlation with home price inflation in the past, household inflation was expected to decline, and the latter is certainly trending lower today. That being said, the timing and magnitude of the moves were a bit uncertain, so it’s definitely good news to see this in actual data.

Inflation in services (which includes housing) was unchanged from March at 0.4%, Inflation in core articles was 0.6%m/m, but most of this was explained by the volatile used car component, which rose 4.4%m/m. In recent months, inflation for basic articles had bottomed out, consistent with a generalization of supply chain problems. In fact, month-on-month inflation for basic articles was hovering around zero since September last year.

This increase in used car prices brought monthly commodity inflation down to 0.6%, but this is unlikely to continue in our view, so commodity prices should decline from this small high in the coming months.

For the equally volatile food and energy categories, we had good news. Although gasoline prices rose in April, this was attributed to a 25% increase in WTI crude prices from mid-March to mid-April; Since then, WTI is down 13%, which should be reflected in the May numbers. Food inflation remained at 0% MoM for the second consecutive month and remained on a downward trend for nine months. Finally, it should be noted that “super-core” inflation, which excludes housing costs and was recently referred to by Jerome Powell, fell to 0.1% MoM, its lowest in 8 months. is reading.

Although the year-on-year inflation figures were flat compared to the previous month, Key components appear to be cooling off, meaning that some of the underlying trends that pushed CPI higher are reversing, However other components are taking a little longer than expected, particularly housing in the CPI basket. Aside from inflation data, the most obvious economic factor that hasn’t shown conclusive signs of moving in the direction desired by the Federal Reserve is the labor market.

In this case, the effect on the CPI basket is indirect through wages and, in turn, the labor-intensive services sector. However, services inflation remained at its month-on-month peak in September 2022, which is encouraging.

Finally, Wednesday’s CPI report, along with the SLOOS report released earlier in the week, which showed continued tightening of financial conditions and a decline in credit demand, will provide FOMC supporters with additional data to argue for a break at your next meeting. should give.