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Morning Report: Consumer price inflation decelerates


Vital Statistics:

Stocks are higher after May inflation came in lower than expected. Bonds and MBS are flat.

Consumer prices rose 0.1% MOM and 4% YOY. Shelter and used cars / trucks were the big contributing factors. Shelter increased 0.8%, however home prices peaked in June of last year so the inflationary push of this component is expected to fade in the coming months.

Jerome Powell has mentioned 3 basic components for inflation – goods, housing, and services ex-housing. The goods issue was driven by supply chain issues in the early days of COVID. That component of inflation is largely finished, and if you look at the ISM reports they pretty much confirm that inventory issues are no longer a problem. The real estate component is likely to fade as the year-over-year comparisons on home prices become much easier.

Finally services ex-real estate are working lower as well. Below is a chart of the CPI with services ex-real estate.

We are still elevated, but the index is falling rapidly. Services ex-real estate is really a proxy for wage inflation. We have seen layoffs in the tech sector, and job openings are working their way lower. Consumer expectations for inflation are decreasing as well.

The Fed Funds futures have moved decisively to a pause forecast for the June FOMC meeting. Certainly the CPI print gives them the leeway to do that. The July futures still see a 60%+ chance for another hike. Before the July meeting, we will get the May PCE inflation reading, and the June CPI / PPI.

Commercial real estate continues to struggle, especially in the office sector. The office sector is reeling from rising interest rates and work-from-home. Manhattan’s official vacancy rate is 17%, and should remain above 20% for the next several years. The unofficial vacancy rate is closer to 50%. Goldman sees continued pain the CRE sector. “There’s no question that the real estate market, and in particular commercial real estate, has come under pressure,” he said in an interview on CNBC’s “Squawk on the Street.” “You’ll see some impairments in the lending that would flow through our wholesale provision” this quarter.

Small Business Optimism increased in May, according to the NFIB. Inflation remains the single biggest problem, although it has eased from its peaks last summer. Job openings are still hard to fill, and average selling prices are increasing overall. Overall optimism still remains historically low:

BLS: CPI increased 0.1% in May; Core CPI increased 0.4%

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