Latest CPI Report Confirms Falling Inflation

Major stock market averages are meandering around without conviction today. The dollar is weaker, giving some room for commodities to rise. WTI crude oil is up over $83/barrel; silver, gold & copper are extending recent gains as well. Despite the release of March inflation data, which was expected to produce huge volatility in the bond market, we’re not seeing much movement today.

The Consumer Price Index (CPI), probably the best-known measure of retail inflation, slowed to an annual rate of 5.0% in March from 6.0% in February. (It’s hard to believe that CPI was 9% last summer!) Anyway, it is getting harder and harder for Fed officials to play down the fact that inflation is trending steadily lower. Digging into the CPI report details, prices in key categories are easing (i.e. groceries, fuel, utilities, medical care, used cars). The Fed has been concerned about sticky services inflation, but today’s report showed that CPI services excluding housing slowed to 5.8% from 6.1%. The fact that housing—“owners equivalent rent”—continued to rise is irrelevant. We know that metric is not just terribly lagged but is also contrived. So actual inflation is probably less than 5%. Indeed, the New York Fed’s own Underlying Inflation Gauge (UIG) has fallen to an annual rate of 3.9% in February.

John Williams and Tom Barkin of the New York and Richmond Federal Reserve banks, respectively, responded to the CPI report by saying that the Fed needs to do more in order to bring inflation down to the long-run target of 2%. However, Austan Goolsbee of the Chicago Fed expressed a differing opinion. “Given how uncertainty abounds about where these financial headwinds are going, I think we need to be cautious. We should gather further data and be careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting inflation down.” Now contrast these views with a couple of high profile economists interviewed on CNBC today. Ed Hyman says the Fed has “already made a mistake” by raising interest rates too high and could cause a recession. Jeremy Siegel says the “Fed has already done too much” and needs to pause rate hikes now. Both note that inflation is falling, money supply is shrinking, bank lending standards are tighter and lending is down. These factors may point to a slowdown.

I recommend watching CNBC’s interview of Warren Buffett this morning. I’ll summarize a few points. He said many of Berkshire Hathaway’s businesses are slower than they were last year. “That doesn’t mean the world is coming to an end or anything.” He indicated that Berkshire is well positioned to weather the storm if there is an economic slowdown. “We don’t depend on everything being hunky-dory always.” For example, while retail is softer and rail car loads are down, the insurance business should strengthen this year. When asked about his economic forecast he replied, “I’ve never found economic forecasts of any use.” And when asked about crypto he said, “I’ve seen people do stupid things all my life. And I empathize with that. I mean, people like to play the lottery.”