Tuesday, June 13, 2023
The latest Consumer Price Index (CPI) print came towards the lower end of expectations with the overall headline inflation falling to the lowest level since April 2021. The encouraging trend in consumer prices will provide the Federal Reserve (Fed) some leeway to keep rates unchanged this month and if the trend continues, the Fed will likely not hike for the rest of the year.
- Consumer prices rose 0.1% in May, pulling the annual rate of inflation down to 4.0%, the lowest annual rate since March 2021.
- The largest contributor to the monthly increase in prices was shelter costs.
- Energy prices were the largest negative contributor, falling 3.6% in May.
- Prices for eating out at restaurants are still rising at a fast clip, indicating that consumer demand in that space is still strong.
- The overall theme in recent months has been strong consumer demand for experiences over goods and we are seeing that play out in consumer pricing dynamics.
Inflation is Going in the Right Direction According to the Market
As demonstrated by the positive stock market moves in early trading today, market participants appear to believe that the latest CPI report shows inflation is heading in the right direction and may give the Fed cover to skip a June rate hike or even pause for a longer period. As shown in the chart below, headline inflation remains above the Fed’s long run target of 2%, but the month-on-month changes are well past their peak and back within the range of historic norms.
Services Aren’t Slowing Down Yet, but Goods Are Declining Gradually
The strong level of service inflation, which continues to counteract the slowing increase in good prices, is further shown in the May CPI figures. While the costs for items are falling, we expect services to remain popular for a while as consumers demand experiences over goods.
Home Costs Expected to Cool
The housing sector is currently a significant factor impacting inflation in 2023. Shelter costs, which hold a significant weight in the CPI, are expected to ease. There is evidence that rent costs will eventually decrease, as can be seen in the robust multi-family construction activity. As more projects hit the market this year due to the increase in condo and apartment building, the supply of multi-family apartments will rise, which should help bring down rent prices. As such, we don’t think it will be long before official government numbers reflect the decrease in rent prices. In the upcoming months, investors and policymakers alike should anticipate a slowing of housing-related inflation.
We have updated our Inflation Dashboard, designed to provide a snapshot of the inflationary environment, with the latest CPI data. The CPI rent of primary residence is the only one of our dashboard indicators that remains at an elevated level, and even that has fallen from an extreme level since April.
We expect that the Fed will keep interest rates where they are for the time being. The Fed may adopt a more hawkish attitude and signal an interest rate increase if any future core inflation readings come in higher than anticipated, but if the inflation trend remains the same, it seems likely the Fed will not hike rates for the rest of the year.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
For a list of descriptions of the indexes and economic terms referenced in this publication, please visit our website at lplresearch.com/definitions.
All index and market data from FactSet and MarketWatch.
This Research material was prepared by LPL Financial, LLC.
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
- Not Insured by FDIC/NCUA or Any Other Government Agency
- Not Bank/Credit Union Guaranteed
- Not Bank/Credit Union Deposits or Obligations
- May Lose Value