Thread by @RickRieder

Today’s #CPI report for May showed another very firm depiction of where #inflation currently resides in the U.S., with #coreCPI (excluding volatile food and energy components) printing at 0.44% month-over-month and 5.33% year-over-year.

Meanwhile, #headlineCPI data printed 0.12% month-over-month and came in just above 4% year-over-year, with declines in #energy components and some food prices being offset by gains in #shelter and used cars and trucks.

Overall, headline #inflation does appear to be moderating at a faster pace and we believe that the trend in inflation (despite the firmness of core measures in today’s report) is broadly heading in the right direction, relative to the @federalreserve’s inflation target.

Additionally, the #Fed’s favored measure of inflation, #corePCE, increased 0.38% in April, bringing the year-over-year figure for the measure to 4.70%, as of that month.

Finally, another measure that’s worth looking at, the @DallasFed’s trimmed mean measure of #PCE inflation, printed at 4.8% year-over-year in April.

Further, we think that even more relevant #inflation metrics for describing current inflation trends can be seen by the 3- and 6-mo. data that displays annualized inflation for Core Services #CPI at 4.9% and 6.1%, respectively in May, vs. highs around 7% in the last six months…

…and Core #services (ex-shelter) at 4.6% vs. a high of 6.7% year-over-year in September.

While #inflation readings in services by these metrics are still strong, #goods inflation has clearly moderated to very acceptable levels.

Services inflation still has yet to approach anything close to #Fed targets, and probably won’t for at least the balance of the year.

We believe that this month will probably have seen a near-term peaking in the inflation prints above the #Fed targets (albeit still elevated), similar to the still high inflation readings we are witnessing in the U.K. and in #Europe over the prior few months.

When considering these recent #inflation readings, the word “#sticky” maintains its status as a prime descriptor, despite economic growth (while still solid) moderating to more tepid levels.

Many have cited the economy to be in, or approaching, #recessionary conditions currently. We believe, however, that the #economy is in considerably better shape than many appreciate, but with a tangible slowing.

We would argue that the focus on the #demand for products and services is grossly overstated in terms of #PricingPressure and inflationary conditions, as opposed to the #supply side of the equation.

In fact, when you look at today’s report, and the #inflation reports post-Covid, it is very clear to us that #supply continues to be the dramatically underestimated condition that has had longer legs to it than many give credit to.

Yet, the #Fed’s influence on prices works mostly through the demand function.

We think demand is clearly on the gentle slope downward, and #supply conditions in a number of places are improving, hence we would anticipate the #Fed to pause/skip at tomorrow’s meeting, but with a keen eye toward the coming inflation data over the next few months.