We get it. Today’s CPI was exactly what the market wasn’t looking for. On all accounts, inflation came in higher than expected. That put the nail in the coffin on a March cut and even took the chances of a May cut down to nothing much better than a coinflip. While disappointing, the trend for both headline and core CPI continues to move in the right direction. Headline CPI came in at 3.1% year/year which is only just slightly above its post-COVID low of 3.0% from last June.Core CPI, meanwhile, fell to a new post-COVID low – technically speaking.The reason we say technically is that while the reported reading of Core CPI was 3.9% y/y and unchanged from December, if stretched out to two decimal places, it fell from 3.91% down to 3.87%.
It may not have been much, but January’s decline in Core CPI extended the streak of monthly declines in the core y/y reading to ten months. Going back to 1960, there has only been one other period where core CPI experienced as long of a streak of monthly declines in its y/y reading. Back in 1975, the y/y reading fell from 11.86% down to 6.73% from February through December. That was a much larger magnitude of decline, but the current period started from a much lower base (5.56%). In the entire history of the series, there have only been five other periods when y/y core CPI declined for eight months in a row. As shown in the chart, most of them occurred very early on in an expansion. That makes sense when you think about it as prices shouldn’t be going down as the economy is strengthening.It’s also why the Fed finds itself in such a difficult position caught between trying to keep a lid on inflation while at the same time avoiding an economic slowdown.
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A CPI Silver Lining
