Inflation's First Official Debut

Hey everybody, welcome back to the Basis Points podcast. I'm Kevin Flanigan, head of investment and fixed income strategy at Wisdomree. We're going to talk about inflation's first official debut. Now, the Middle East war has substituted tariff induced inflation concerns with fears of rising energy prices running through the economy. And on Friday, the Bureau of Labor Statistics, the BLS, released its March CPI report where the markets and investment community received their first, let's call it, official glimpse of how the surge in energy prices has begun to impact the US inflation setting. Now, the numbers themselves actually came in rather close to consensus estimates, but the elevated headline reading in particular did make some milestones. So, for the record, the monthly gain for overall CPI came in at 0. 9%. That's on the plus side, obviously. The largest jump since 2022. Meanwhile, the year-over-year increase registered its highest level in about 2 years. Now, this rise of nearly a full percentage point both for the monthly and annual readings was no doubt a reflection of the war-related surge in crude oil prices, specifically for gasoline at the pump. In fact, it was reported that gasoline prices as measured in the CPI report recorded its highest increase on record since 1967. Okay, so now against this backdrop, it's natural to ask, well, what about core? In other words, CPI excluding food and energy. And that was far tamer. It came in with a year-over-year gain of 2. 6%. And it should be noted that this March increase did interrupt a bout of disinflation. And this was for the first time since July, the core gauge actually saw an increase itself. So let's take core inflation a little bit further. And although core has been returning to a more disinflationary pattern prior to March, it still remained above the Fed's preference. And that brings us to the Fed's preferred inflation gauge, and that's the core PCE deflator. And unlike with the CPI measure, this gauge has actually been trending to the upside on a pre-war basis. And the year-over- reading stands at 3% and that's a full percentage point above the Fed's 2% target. Remember, this was for February or pre-Middle East War. So, the March PCE data, that's not going to be released until the end of this month. Right now, it's scheduled for April 30th. And it's probably reasonable to expect to see not only headline PCE deflator to jump but also the core measure remaining above the Fed's target. So if the Middle East war moves into a more permanent deescalation phase or say ends, we would expect energy prices to decline in measurable fashion. However, the scope of disruption has moved higher and energy prices may not be able to completely reverse back to pre-war levels in the months immediately ahead. So, in our opinion, the Fed will attempt to look through this recent surge in energy prices. And yes, this development has created a noteworthy shift in inflation fears. But the policy makers at this point anyway seem to be operating under the assumption that any elevation in price pressures from higher energy costs will not be a permanent development. But Palen company I'm going to bet will be loathed to use the term transitory. Right? So given the war related uncertainty and the recent jobs and inflation reports the Fed appears to be in a holding pattern. And the most important takeaway for the financial markets, they're going to be operating in a scenario where rate cuts are either near or at the end of this easing cycle. So that's it from here. Hope everyone's doing well. Have a great rest of the week.