• Core inflation landed on softer expectations, but was not soft
  • Cooler volatile core services inflation drove it
  • Breadth continues to improve
  • The FOMC will want more evidence
  • US CPI headline / core, m/m %, SA, April:
  • Actual: 0.3 / 0.3
  • Scotia: 0.4 / 0.3
  • Consensus: 0.4 / 0.3
  • Prior: 0.4 / 0.4

Markets expressed mild relief toward a pair of US inflation and consumer spending prints that change nothing yet for the FOMC. The result had markets gently piling into the US front-end, driving a weaker dollar, and putting a bid to US equities. That’s a sensible market reaction in a positioning sense that has been programmed to be surprised by higher core inflation readings this year which didn’t happen this time, but it’s not going to sway the Fed any time soon.

Core CPI landed at 0.29% m/m SA which rounds to 0.3%. That matched just about every estimate within consensus and across nowcasts. At 3.6% m/m SAAR, core CPI is still too hot for the FOMC’s liking (chart 1), but it’s very slight, tentative progress relative to four-handled readings in each of the prior three months.

Chart 1: US Core CPI Inflation Sticky


The US two-year Treasury yield initially fell by about 7bps after the data before retracing some of that move. The dollar broadly weakened at first, but also retraced some of the initial reaction. S&P futures jumped about ½% at first and are slightly building on that gain in the cash market.

Fed funds futures are pricing nothing for June, only about 8bps for July, and still about 22–23bps for the September meeting which remains my base case for a first cut. Markets added a few more basis points to cumulative easing this year and are now pretty much bang on pricing a 50bps reduction.

Services Inflation Eases

The main driver of the softer core CPI reading this time was on the services side. Core services CPI ex-housing and ex-energy services was up by 0.4% m/m SA which is not light, but it is toward the lower end of the recent range following gains of 0.85% m/m SA in January, then 0.5% in February, then 0.65% in March (chart 2).

Chart 2: US CPI Core Services Ex-Housing

Core goods inflation remains soft as prices for commodities ex-food and energy continue to fall (chart 3).

Chart 3: US Goods Inflation

Softening Breadth

Breadth is improving. Charts 4–5 drive this point home.

Chart 4: US Inflation Showing Declining Breadth; Chart 5: US Core Service ex Housing Inflation Still Showing Waning Breadth

So do charts 6–7 on the next page that break down the change in CPI by component and the weighted contributions to the overall change in CPI in y/y terms. Charts 8 and 9 do the same thing for m/m price changes on the following page. On a month-over-month basis there were about 4 categories that stood out in terms of weighted contributions to the price changes and little breadth beyond that.

Chart 6: April 12-Month Changes in US Headline CPI Categories; Chart 7: April Weighted Contributions to the 12-Month Change in US Headline CPI
Chart 8: April Changes in US Headline CPI Categories; Chart 9: April Weighted Contributions to Monthly Change in US Headline CPI

One of those categories that remains very sticky is shelter costs. Chart 10 shows owners’ equivalent rent held in at the same pace of increase as the prior couple of months. Chart 11 shows ongoing persistent pressure in rent inflation. 

Chart 10: Sticky Housing Inflation; Chart 11: US Rent Inflation

Since the Fed is mandated to target total inflation they cannot just ignore 36% of the basket that is hot. There are similar debates elsewhere like in Canada. What is frustrating is the length of time it is taking for easing market rents to show up in lighter shelter cost inflation. There is always a lag, but the length of time is getting toward the extremes of the amount of time it should take (chart 12).

Chart 12: Cooler Housing Market Showing Up in Official Inflation Data


Charts 13–21 show other breakdowns of the CPI basket with comments to follow.

Chart 13: US CPI: Gasoline; Chart 14: US Food Prices; Chart 15: New vs Used Vehicle Inflation; Chart 16:  Soaring US Motor Vehicle Insurance
Chart 17: US Airfare; Chart 18: US Apparel; Chart 19: US CPI: Recreation Services; Chart 20: US CPI: Household Furnishings
Chart 21: US Financial Services

Headline CPI unexpectedly matched core CPI instead of being firmer as expected because a rise in gasoline prices was tempered by cooler food prices.

New vehicle prices fell by –0.4% m/m SA which was about what was expected. I was surprised by the 1.4% m/m SA drop in used vehicle prices. Industry guidance including on trade-in values pointed to a seasonally adjusted gain and are usually a better advance indicator than, say, measures of used vehicle prices at auctions.

Other transportation categories were mixed, such as soft airfare, versus another large jump in auto insurance premiums.

Clothing prices soared by 1.2% m/m SA with broadly based gains except for outerwear.

Recreation service prices were up at a slower pace, prices for household furnishings fell again, and so did food prices. Prices for financial services and health care continue to creep higher. Please also see the detailed table and micro charts in the appendix.

Table: US Inflation Component Breakdown
Table: US Inflation Component Breakdown
Table: US Inflation Component Breakdown