The US Inflation Tracker captures the trends that provide context in today’s economy.

Core Service Inflation in the Driver’s Seat
This month’s Core Consumer Price Inflation print came in stronger than expectations, raising fears of a re-acceleration in inflation and bringing the “higher for longer” narrative back into play. But parsing through the data, it’s doubtful that this changes the outlook for monetary policy going forward.

A few things to note with the details of this release. Core goods, which has been in deflation for some time and has helped to offset price increases on the services side of the equation, flipped this month. While still basically a nonfactor, it did put upward pressure on inflation for the first time since May of 2023. Core goods actually rose 0.113% vs. the previous month, a likely product of the inventory drawdown exhausting and some shipping cost-related issues.

But the main driver of inflation continues to be the core services segment of the inflation basket. And here we see more of the same, with the highly volatile segments driving the bulk of the increase. A hot transportation services number was the culprit, driven by airfares and motor vehicle insurance. Shelter remains a thorn in the side of the disinflation process, with owners’ equivalent rent and rent of primary residences contributing 16bps out of the 44bps increase in the month-on-month print. Sticky? Yes. But we still expect further cooling going forward. The bottom line: Inflation is not getting away from the Federal Reserve relative to their forecasts.

Contribution to Month-on-Month Core Consumer Price Inflation (12/31/19–2/29/24)

Contribution to Month-on-Month Core Consumer Price Inflation (12/31/19–2/29/24)
Source: Natixis Investment Managers Solutions, Bloomberg

It’s All About Shelter, Airfare, and Vehicle Insurance
With core services being the primary driver of Core CPI, we find three categories that have consistently caused this segment to remain sticky: airfares, shelter, and motor vehicle insurance. Outside of these three line items, core services have, on average, been running well below a monthly change of 0.20% for more than a year. And an average monthly increase for core services of 0.20% or softer going forward would put Core Consumer Price Inflation back to the Fed’s 2% target by the end of summer.

The issues surrounding shelter have been well documented and are not worth rehashing. But while airfares remain highly volatile, motor vehicle insurance has remained sticky for almost three years now and is something that higher interest rates probably cannot solve. The same logic can be applied to shelter costs as well. The Fed has hiked rates over 500 basis points and yet the shelter component continues to show signs of stickiness. Is this primarily a function of lack of supply – especially given that the Fed can’t build apartments and houses?

Inflation was never a straight line up, nor should it be a straight line down. The longer-term trajectory for inflation is still softer. The most recent prints are bumps along that road.

Contribution to Month-on-Month Core Services CPI (12/31/19–2/29/24)

Contribution to Month-on-Month Core Services CPI (12/31/19–2/29/24)
Source: Natixis Investment Managers Solutions, Bloomberg

Resource

US Inflation Tracker – March 2024
This in-depth chart deck highlights historical data related to:
• Personal consumption
• Inflation surprises
• Goods and services
• Base effects and surges
• Supply chain, shipping, and restocking
• Housing market pressures
• Wage pressures
• Inflation expectations


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This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Natixis Investment Managers, or any of its affiliates. The views and opinions expressed are as of March 19, 2024, and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.

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