CPI Inflation Rate Cools, Lifting S&P 500 Futures; The Fed Would Be Crazy To Hike

The consumer price index showed that price pressures slackened more than expected in March, as prices for energy and groceries fell, but core inflation remained firm. Although core inflation remains well above the Fed’s target, the most timely data on the job market and credit conditions should give policymakers more than enough reason to forego one last right hike next month. S&P 500 futures rallied in early Wednesday stock market action after the CPI report.

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CPI Inflation Report Hits And Misses

The CPI inflation rate eased to 5.0%, down from 6% in February and below 5.2% forecasts. The consumer price index rose just 0.1% on the month, vs. forecasts of 0.3%.

The core CPI, excluding food and energy, rose 0.4% vs. February levels, matching expectations. The annual core inflation rate edged up to 5.6%, matching forecasts. The core CPI inflation rate peaked at a 40-year-high 6.6% in September.

Fed Chair Jerome Powell has said that the most important category of spending for the inflation outlook is core nonhousing services, reported with the Commerce Department’s late-month personal income and outlays data. Wall Street looks to the CPI gauge of services less rent of shelter as a reasonably close proxy, but it has serious shortcomings.

March’s CPI showed services less rent of shelter prices were unchanged on the month but rose 7.1% from a year ago vs. 6.9% in February. However, a 0.5% drop in the cost of medical care services distorted the monthly figure. That reflected a 4.2% monthly drop in the cost of health insurance. But the CPI report’s methodology focused on health insurer profits from the previous year doesn’t yield a timely, useful data point.

Fed Policy Impact

Ahead of the CPI report, markets were pricing in about 74% odds of a quarter-point Fed rate hike on May 3, dropping to 67% after the data. Just a week ago, those odds were only 43%.

Although Friday’s jobs report showed solid overall hiring, many underlying details like wage growth were soft. Yet the jobs report is based on midmonth surveys, which were conducted too early to exhibit any impact from the bank crisis that erupted just a week earlier.

More current data provides even more reason for concern about where the economy is headed.

Revised data from the Labor Department, after a correction to its seasonal-adjustment methodology, shows that claims for unemployment benefits have been running much higher than realized. A total of 228,000 people applied for unemployment benefits in the week through April 1, far above views for 201,000. Claims for the prior week were revised up by 48,000 to 246,000.

The four-week average of jobless claims dipped -4,250 to 237,750. Yet that’s still up about 25% since the start of October.

On Tuesday, the National Federation of Independent Business said its March survey of small businesses found that a net 15% of firms plan to hire in coming months. That’s the lowest since May 2020, just after Covid hit.

Meanwhile, the NFIB survey suggests small businesses are being starved for credit. Only a net 2% of firms think it’s a good time to expand. Jim Bianco, president of Bianco Research, noted on Twitter that the measure matched the lowest level since 1980.

CPI Report Details

Core goods prices rose 0.2% month. That raised the 12-month core goods inflation rate to 1.5% from 1%.

Energy prices dipped 0.6% on the month and are now down 3.5% from a year ago.

Prices for food at home rose continued to moderate, actually falling 0.3% on the month. Food away from home prices rose 0.6% from February.

The CPI report showed used car prices falling 0.9%, while new vehicle prices rose 0.4%.

Apparel prices rose 0.3% and are now up 3.3% from a year ago. Transportation services prices rose 1.4%.

S&P 500 Reaction To CPI Report

After the CPI report, S&P 500 futures climbed 0.6%, easing off initial highs. The S&P 500 slipped 0.2% on Tuesday, closing near its highest level since mid-February.

Meanwhile, the 10-year Treasury yield slipped 6 basis points to 3.37%.

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