Yesterday’s Consumer Price Index (CPI) showed a surprising jump in the US inflation rate.
Signaling investors' disappointment, the S&P 500 fell below 5,000 and the Nasdaq 100 dropped -2%.
According to one analyst ( as reported by Bloomberg), the report is throwing “cold water” on prospects for a [Fed] rate cut anytime soon. He continued “sticky...inflation is likely to give the Fed pause.”
With the unexpected price increases reported yesterday, year-over-year inflation – as measured by CPI – rose to 3.9%, nearly double the Fed’s 2% target.
However, as much as it may have moved markets, the CPI is not even the Fed’s preferred method for measuring inflation.
Rather, since 2012 the Fed has looked at another inflation gauge - the Core Personal Consumption Expenditure Price Index (Core PCE).
As of end-December Core PCE was just 2.9%, a whole percentage point closer to the Fed target than the CPI figure.
But what if both measurements are much too high and true inflation is not so sticky after all?
Economist Campbell Harvey recently made just such a claim in a recent LinkedIn post.
Campbell argued that using real-time shelter inflation instead of the lagged data used by the government, both CPI and Core PCE have actually been “sub 2% for a year” already.
In case LinkedIn isn’t your preferred source for financial guidance, San Francisco Fed research reached startlingly similar conclusions.
The SF Fed’s housing cost forecast – also based on real time data – predicts 2024-25 will augur “the most severe contraction in shelter inflation since the Global Financial Crisis of 2007-09.”
As shelter costs are the largest component of both CPI and PCE, Campbell posits the Fed’s use of outdated sticky data are resulting in restrictively high rates that “greatly increase the probability of an unnecessary recession.”
In the near-term, we'd argue real time shelter inflation data suggest yesterday's rout was folly. When the official data catches up a market-friendly rate drop is the most likely outcome.
And as for the longer-term, unlike Campbell, we're not nearly as secure in the view temporarily restrictive rates will result in recession.
