Telemus Weekly Market Review June 5th - June 9th, 2023
This coming week, markets will be highly attentive to economic news. On Tuesday, the Bureau of Labor Statistics will release its monthly Consumer Price Index (CPI) for the month of May. This will offer an indication on inflationary trends. Following this release, on Wednesday the Federal Reserve Open Market Committee concludes its two-day meeting and will determine whether it’s necessary to raise interest rates another notch.
After making a steady climb, the pace of inflation has started to level off or even decelerate depending on the measure you are looking at. The Consumer Price Index peaked with an annualized increase of 9.1% back in June of 2022. Since then, the rate of inflation has continued to decelerate. If the CPI data for May and June of 2023 come in consistent with recent month trends (of around a 0.4% monthly increase), then we could see the annualized inflation rate bottom out in the 3.5% to 4.0% range this time next month. That’s a nice retrenchment from 9.1% a year ago. A key contributor to the decline in the annualized rate of inflation has been steep declines in energy prices, which have helped to offset price gains elsewhere.
Economists also look at the Core CPI measure, or CPI excluding energy and foods prices. This measure tries to remove these two more volatile categories. Core CPI has had a different experience than the full CPI basket. It’s been stuck trending between an annualized rate of 5% and 7% for the past year. In fact, following the release of the March data, annualized Core CPI rate of 5.5% presently sits at a greater level than the full CPI basket, which through April had risen 4.9% over the past year. The difference between these measures is due to the significant impact that sharp declines in energy prices have had on the CPI index.
Consumer Price Index and Core CPI (all items less food and energy)
Source: Bureau of Labor Statistics
One added measure that is looked at as an inflationary indicator is the Producer Price Index (PPI). This less familiar gauge is used as a guide on where inflation may be going. It measures input costs for industrial companies. Given recent declines in commodity prices, the PPI index has decelerated considerably falling from 11.2% (annualized) in June of 2022 to 2.3% in April of 2023. Lower input prices means that there is less need for goods and service providers to raise prices as significantly or at all going forward.
We look favorably on the deceleration that has occurred in inflation over the past year. The annualized measure of inflation, which adds up the trailing monthly inflation readings over the past twelve months, has the potential to trough after the June reading. The reason being is that April through June of 2022 had exceptionally high monthly CPI readings. As these roll out of the trailing twelve-month calculation, the trend starts to even out with monthly CPI readings in the 0.0% to 0.5% range. What the Federal Reserve will be looking for is an indication that inflation can continue to trend down from the 3.5% to 4.0% range we seem to be settling in at. Their target is for inflation to approach 2% on an annualized basis. Therefore, we will need to start seeing monthly CPI readings trending down toward the 0.2% range. That may prove to be the next challenge.
When it meets this week, the Fed will be discussing whether its current policies are enough to get inflation from roughly 4% today down toward its 2% goals. The debate around the correct policy will not only occur at this meeting but continue into future meetings in the months ahead. We don’t expect to be able to answer the question on where exactly inflation is headed question after this coming week. However, we will have incremental datapoints that will help paint a clearer picture of how this plays out in months ahead.
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