US CPI/PPI

Couldn't ask for a cleaner confirmation of our thesis for ongoing disinflation. The top five irreducible categories, making up 38% of index weight, contributed 18 bp to a headline inflation number that printed at 7 bp, therefore more than explaining the whole thing. The inescapable conclusion is that the other 62% of the basked must have been in outright deflation in May. Not clear this will change any thinking at the Fed, but it might help that December dot we'll see later today show two rate cuts, not one.

Another disappointing month for inflation. But don't lose your courage just yet. Market expectations have shed almost 5 rate cuts so far this year, and yet  everything is just fine (the Fed isn't as tight as it says). Does this mean there will be hikes? No. Core CPI ex-OER at 2.51% YOY is just one basis point above the Fed's target for it. 

A huge miss. We're disappointed, markets are disappointed (even though markets were expecting less than we were to begin with). Housing is a big culprit -- it's high and accelerating, and as of this year's new weightings announced today it has a bigger influence (it's also the most ridiculously laggy component). We still get one more CPI before the March FOMC, but at this point hard to see how it could be good enough to drive the first rate cut then.

A mixed bag in CPI this morning -- the FOMC tomorrow will be able to project whatever it wishes into it. Goods, half that basket, are in downright year-on-year deflation. And most categories are decelerating. But Powell's super-secret private index, core services ex-shelter, a minority of the basket (but the one he focuses on), is accelerating (thanks to the methodological change in the calculation of medical services, which have an even larger weight in PCE than in CPI). This is not the clarion call warning of deflation that we had expected and hoped for. We'll have to wait another month for that -- nothing in this changes our expectations.