March CPI release came in hotter than anticipated with core and headline inflation coming in at 0.4% and 0.4%, respectively. The recent barrage of hawkish Fed speak proved warranted in light of March’s inflation release suggesting achieving the “last mile” of inflation on the journey to the 2% target is going to prove more challenging than initially perceived considering the 3, and 6-month annualized rate of Core CPI is running at 4.8% and 4%, respectively. Josh Jamner, Investment Strategy Analyst at ClearBridge Investments notes the following regarding the latest inflation data.
- After experiencing the first positive move higher in core goods inflation since May 2023, the trend of lower goods prices reasserted itself in March with used car pricing reversing last month’s strength coming in at -1.1% which was accurately foreshadowed by the recent decline in used car auction prices. A return of goods deflation is a welcome development as its been one of the main drivers lower of inflation over the past 18 months
- The problem child continues to be sticky shelter inflation with its biggest component OER coming in at 0.4% on the month. OER hasn’t had a print lower than 0.4% since August 2021. Shelter inflation has remained sticky even though many private measures of rent growth have been showing declines for a year. While this gap may eventually close, the bifurcation remains after today’s release.
- Airfares decreased -0.4% in March, partially reversing the largest monthly rise in that subcomponent going back almost 2 years (May 2022). However, airfares are one of the categories that do not carry from CPI over to the Fed’s preferred core PCE measure as PCE measures airfares from tomorrow’s PPI release.
- Motor vehicle insurance continues to be a source of sustained inflation seeing its largest monthly reading since July 2020 while increasing by +20% over the last 12 months.
Bottom Line: The battle between the sticky vs continued disinflationary narratives is moving decidedly toward an inflation backdrop that is plateauing and potentially accelerating. March’s hot CPI release coupled with last month’s hot jobs data reaffirm that the Fed will remain data dependent requiring more data to feel confident for the commence of the rate cutting cycle. This inflation release effectively takes June off the table for the first rate cut and should push the odds out further with a coin toss in July or September. This release should put upward pressure on 10-year treasury yields along with the broader equity complex as valuations come down.
ClearBridge Investments is a leading global equity manager with $176.6 billion in assets under management as of December 31, 2023.
