Sticky
On Tuesday, the S&P 500 and the Nasdaq added 0.3% and 0.9%, respectively, to close at new record highs, while the Dow Jones lost 120 points.
Equities pared earlier losses after a fall in bond yields triggered speculation that Wednesday’s inflation reading might strengthen the case for the Federal Reserve to cut rates this year.
Financials and industrials were the worst-performing sectors, while technology rose.
Apple shares climbed 7.2% to a record high, a day after unveiling new AI features to increase the appeal of its devices.
Meanwhile, JPMorgan sank 2.6%, Tesla lost 1.8%, and Exxon Mobil fell 0.8%.
With the May CPI report due this morning, let's revisit the two hot spots in the report - auto insurance and owner's equivalent rent make up about 30% of the CPI. Both have been hot, and have been propping up the overall index, and the Fed's current restrictive interest rate policy is powerless to bring them down.Â
Here's a visual on why ...
Above is motor vehicle insurance. This has risen at a 20% year-over-year rate for five consecutive months (the actual data is represented by the blue bars).
Even if this auto insurance index were to flat-line from this point (i.e. zero month-to-month change in this insurance price index), it would still take seven months for the year-over-year measure to fall below double-digits (that scenario represented by the orange bars).
So, even if the insurance hikes are over, this year-over-year measure will continue to put upward pressure on the inflation data for months to come.Â
Next is the heavier weighted component that's been propping up CPI: Owners' Equivalent Rent (which is also influenced by the sharp rise in insurance rates).
This makes up 27% of the consumer price index. And you can see in this chart below, it has directly contributed at least 1.5 percentage points to the year-over-year change in CPI for 22 consecutive months. The streak will likely continue in today’s report. The orange bars represent the path IF this component were to flat-line over the coming months (zero monthly change).
This too, will continue to put upward pressure on CPI for the months ahead.
What does it mean? The year-over-year computation of these two components is creating the illusion that inflation is "sticky" at higher levels.
It also could mean that inflation is sticky at higher levels as there remains scant evidence that rents are declining or OER is declining. I know about the new housing coming on the market, but that has been true for a long time, and rents continue to rise at a solid clip.