Today’s CPI report was good because it shows core inflation, which the Fed cares about, is trending in the right direction. The Fed feels much better today because of all the rate hikes they have done to get the Fed funds rate above the growth rate of inflation.
Last year, CPI core inflation was running at 6.3%, and shelter inflation was still higher even though the data line was set to cool down. I talked about this on CNBC when they asked me to forecast the reality of rent inflation in 2023. Over a year has passed since that day, and core inflation is running at 4.1%, lower than the Fed funds rate. As you can see in the chart below, inflation has made progress in the right direction.
So, while the bond market doesn’t like this report, the Fed members must be pleased with the progress made. Yes, today’s jobless claims data came in good again as the four-week moving average of jobless claims is near 200,000 — not close to my Fed pivot level of 323,000. However, regarding the growth rate of core CPI, the slow trend lower is something the Fed likes to see.
From BLS: The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4 percent in September on a seasonally adjusted basis, after increasing 0.6 percent in August, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.7 percent before seasonal adjustment.
Part of the reason the Fed has not hiked as much recently is that they know the growth rate of inflation is falling, but they still want to attack the labor supply because of some fear that wages might spiral out of control again. This explains the Fed’s hawkish tone after the last Fed meeting when they didn’t hike rates, giving the bond market the green light to push the 10-year yield higher.
Now, over the pat 10 days, seven Fed presidents have tried to talk the bond market down. After this report, I expect them to stick to that game plan.
Also, shelter inflation has a lot of room to move lower, and since shelter inflation is 44.4% of CPI, we have enough data to scream at the Fed: “Land the Plane, Jay! You’re done.” Once you exclude housing, the Core CPI was 0.1% monthly. This has been a trend over the past few months, which the Fed well knows.
While I don’t believe that we will see the builders finish all the rental supply under construction because construction loan rates are too high, we will still get more supply to the rental marketplace over time. That will help with the shelter inflation data, which peaked a while ago.
So, even though the headline inflation print was a tad hotter than forecast, the core inflation trend is moving along in the right direction, and that is what the Fed cares about the most. The Fed wants to keep the Fed Funds rate higher for longer. They want to ensure that core inflation returns toward 2% so they keep talking hawkish. However, the recent 10-year yield spike has forced them to try to talk the market down. Even today, the 10-year yield spiked after the report and kept heading higher, currently at 4.71%
Now that core inflation is lower than last year, the Fed doesn’t need to be talking about rate hikes anymore. Even talking hawkish with where inflation and rates are at doesn’t make sense.
Regarding the bond market, mortgage rates, and the Fed, I talked about this on the HousingWire Daily podcast this week trying to make sense of why so many Fed presidents are trying to jawbone the bond market from getting out of hand. Hopefully, with all the data about inflation and rates, it’s a good reason for the Fed to just chill, enjoy Halloween, Thanksgiving and Christmas, and let’s not play the Scrooge role now.