May CPI Reaction

Key Takeaways

• Core CPI MoM actual at +0.2% vs. +0.3% expected surprised ~10bps lower than expected, in line with our call for a -5bp average surprise
• Crucially, we identified an important dynamic that would drive the downward surprise - lower wage growth from declining bargaining power or workers vs. employers that our unique measures first identified at the beginning of March
• This slower wage growth resulted in broad-based disinflation in the CPI index and Services CPI posted its lowest MoM gain since August 2021
• As always, the question remains if May’s PPI inputs into PCE will also be benign with different measurements of auto insurance and airfares being particularly pertinent this month given their weakness in the CPI
• The Fed kept rates on hold as expected while moving their median rate cut projections up to signal just one cut this year. Future inflation prints will remain integral to the future path of rates - we see little reason for yields to decline further from here before the next CPI print in July unless there is an unexpected shock to the economy
• MacroX is closely watching three of our measures to signal any unexpected weakening - our growth nowcast, our unemployment nowcast and our layoff tracker. Thus far in June, none are signaling anything other than an economy that is softly landing

Getting the CPI direction and mechanism right

Today’s CPI inflation data was unambiguously encouraging. MacroX had suggested that Core CPI would likely come in lower than the current consensus by 5bps on average over its next three prints (e.g. 0.25% vs 0.3%) and this dynamic did indeed play out (although we were slightly surprised to the extent). Indeed, both headline and Core CPI came in weaker than expected (0% vs 0.1% and 0.2% vs 0.3% MoM) with Core CPI YoY at its lowest level (3.4%) in over three years. Yields have fallen ~10bps on the day with the 10yr now at around 4.3%.

Most encouragingly, we nailed the mechanism of lower wage growth via lower worker bargaining power two months ago. Our obsession with intuitive and theory-based mechanisms should help our work be more consumable and actionable for all investors.

May CPI: Services Inflation falling and disinflation not caused by outliers

Looking under the hood of the report, Services CPI increased by 0.2% MoM - its lowest level since August 2021. Since Q1 of this year, our measure of wage pressures has consistently shown lower wage pressures compared to 2023. Given the widely acknowledged link between wages and services inflation, we expected this would moderate services inflation (which we tested statistically). This print helps vindicate this judgment.

Fed Reaction

The Fed meeting went as expected with the FOMC keeping rates on hold. However, their projections for rates and inflation in 2024 both rose (as we expected) with the median Fed member seeing only one rate cut this year (from 3 in March) and for the PCE/Core PCE indices to rise 2.6%/2.8% (versus 2.4%/2.6% in March). Our internally-trained LLM scored the press conference as neutral which helps explain the lack of market reaction.

Fig 3: MacroX’s Fedspeak LLM scored the press conference as neutral - the above GIF shows the progression of this score through time

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