Today's US CPI report was slightly on the soft side but what's more notable is why held up as much as it did. Most components are back to the Fed's target but 70% of the monthly rise in April was due to 2 factors:
- Gasoline
- Owners'-equivalent rent
On gasoline, the good news is already baked in with oil prices today touching the lowest since February. Crude is trading $10 below where it was in April, so that's coming. In any case, the Fed usually looks through gasoline prices anyway.
On OER and rent, that rose 0.4% in April and has stayed stubbornly high.
"Housing inflation is puzzling because if you look at market rents, they down but the official numbers haven't come down," Chicago Fed President Austin Goolsbee said in April.
Increasingly, the market is growing confident that it's only a matter of time, because of charts like this (via BBG):
You could argue this chart is just smoothed (and certainly lagged) but the new tenant index continues to fall and the Zillow index is below pre-pandemic levels. In today's report, rents rose 0.35% m/m, which is still too high but the lowest since August 2021.
"The Zillow index has risen about 28% since March 2021, while the new BLS index tracking new tenants is up just 16% over the period. OER, meanwhile, is somewhere between the two, having risen about 20%. Which market measure the OER will eventually converge with is a subject of great uncertainty," writes Bloomberg.
Eventually, you have to assume this chart unfolds as it looks, then it's only a matter of time until it flows into CPI and gives the Fed the greenlight to cut. That's what the market has been cheering for lately.
