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CPI data from the BLS, PCE data from the BEA, chart by Mish

Chart Notes

• The Consumer Price Index Numbers (CPI) are from the BLS.
• OER stands for Owners’ Equivalent Rent. It is the price someone who owns their own home would pay if instead they rented.
• PCE stands tor Personal Consumption Expenditures. The PCE price index is the Fed’s favorite measure of inflation.
• The CPI overweighs shelter vs the PCE.
• I calculated these numbers to two decimal places. The BLS and BEA round to a single decimal place.

OER is the single largest component of the CPI with a weight of 26.64 percent. Rent has a weight of 7.62 percent, and the broader shelter index has a weight of 36.16 percent.

Understanding My Reader’s Claim

The year-over-year CPI and PCE for May will decline if the May month-over-month numbers are lower than the May numbers a year ago.

But will the Fed focus on core numbers or the overall numbers?

The core numbers exclude food and energy.

Numbers to Beat

• PCE: 0.11 Percent
• Core PCE: 0.29 Percent
• CPI: 0.11 Percent
• Core CPI: 0.36 Percent
• CPI Rent: 0.52 Percent
• CPI OER: 0.53 Percent

I agree with my reader that the base CPI and PCE numbers will be extremely difficult to beat. This is why he thinks I am two month’s early

But the Fed will watch the core numbers more closely. And the CPI core numbers will depend on OER and Rent.

I think the Fed will be happy with a big improvement in either the core CPI or core PCE. This also depends on the next two jobs reports and the unemployment rate.

Rent and OER

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Rent has gone up at least 0.4 percent for 32 months.

For discussion, please see my May 15, 2024 post CPI Up 0.3 Percent With Rent Still Rising Steeply, Food a Bright Spot

Yet Another Groundhog Day for Rent

Rent of primary residence, the cost that best equates to the rent people pay, jumped another 0.4 percent in April. Rent of primary residence has gone up at least 0.4 percent for 32 consecutive months![So has OER]

The “rents are falling” (or soon will) projections have been based on the price of new leases and cherry picked markets. But existing leases, much more important, keep rising.

Only 8 to 9 percent of renters move each year. It’s been a huge mistake thinking new leases and finished construction would drive rent prices.

Most leases renew in May through August. I expect rent to moderate soon.

That last line above is the key one. I finally think we see a drop in the rate of increase in rent and OER. If not in May, then June.

But the Fed’s decision will also depend on the Jobs reports for the next two months as well as economic data in general.

Expect a Fed Rate Cut in July

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Market odds courtesy of CME Fedwatch, annotations by Mish

For further discussion, please see I Expect a Fed Rate Cut in July Despite Market View of 18.5 Percent Chance

At the risk of looking silly, I think the market is wrong about the odds of a Fed rate cut in July. What Will It Take?

To cut rates, the Fed will need some combination of weak jobs, rising unemployment, and improving year-over-year inflation.

My reader could be correct. If there is no rate cut in July, then look for one in September.

A week ago, the probability of a rate cut in September was only 46.9 percent. Now it’s up to 70.6 percent!

A Second-Quarter Recession This Year Looks Increasingly Likely

This morning I commented A Second-Quarter Recession This Year Looks Increasingly Likely

As I watch the evolution of consumer spending, housing starts, new home sales, and GDPNow trends, it appears the economy has peaked.

In the above link, I outline numerous ways the economy is weakening.

My bet is the jobs reports will be tame and/or that there will be enough improvement in OER and rent to support a rate cut.

There is an additional wild card. The Fed will make excuses to do whatever it wants to do.

If the Fed is looking to cut rates before the election, there are only two realistic chances, July and September. There are no Fed meetings in August or October.

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