After a string of months of promising disinflation progress, January CPI will likely show a bounce in headline inflation due to higher energy prices and persistent owner’s equivalent rent inflation.
Improving global PMIs and a much better-than-expected employment report have recently given investors new confidence that the economy can avert a near-term recession, boosting market sentiment and stock prices. Meanwhile, the Fed has remained mostly steadfast in its hawkish messaging, raising the likelihood of additional 0.25% rate hikes in both March and May. This week, attention shifts to a slew of inflation data for January.
After a string of months of promising disinflation progress, January CPI will likely show a bounce in headline inflation due to higher energy prices and persistent owners' equivalent rent inflation. Manheim data last week also showed that used car prices spiked in January, breaking a trend of sharply falling auction prices and warning of a turn in a major contributor to lower core inflation in recent months. However, while the data may signal some plateauing in used car disinflation in the coming months, higher auto inventories and bloated dealers’ margins in the context of softening consumer demand still point to a need for further declines in new and used vehicle prices. Other data also show price pressures unwinding convincingly. Pricing indicators from the manufacturing and services PMI surveys have declined sharply since mid-2022, down to a combined value of 56 from a peak of 85 last March.
We think the disinflationary wave has room to run, but progress won’t be linear and inflation data in the very near term could plateau or even turn higher. Still, gathering evidence on a broad weakening of economic growth and inflation should soon lead the Fed to reverse course. For investors, it’s also important to take a longer-term view amidst choppy economic data and position portfolios for the eventual return to a slow-growth and low-inflation economy.
