While inflation has continued to cool in 2023, official government headline readings excluding food and energy have remained sticky. The overall Consumer Price Index (CPI) has seen its year-over-year (YoY) increase subside to +4.9% in April from a 40-year high of +9.1% at last year’s peak, but core inflation has only fallen about a percentage point to +5.5% YoY. Disturbingly, the Fed’s preferred personal consumption expenditure (PCE) gauge recently ticked up a notch to +4.7%, noted in figure 10.
Sources: Bureau of Labor Statistics (BLS) and Bureau of Economic Analysis (BEA), data through March 2023. Shaded areas indicate U.S. recessions.
It is interesting to note that there has been increasing discussion about just how accurate the official government measures of inflation are. While the Fed may be paying close attention to gauges such as core services ex-shelter, the debate is whether the proxy utilized by the BLS accurately captures pricing trends in the housing sector. WisdomTree’s alternate inflation measure reveals that inflation has come down far more than the headlines suggest, as shown in figure 11.
Source: WisdomTree calculations. Inflation data from BLS. Alternate measures of shelter inflation include replacing Primary Rent with Zillow Rental Index and BLS Owners’ Equivalent Rent with Case-Shiller Housing Data as of 5/31/23.
Summary: Without a doubt, inflation data will continue to dominate the markets’ focus, along with the jobs number. The decelerating trend in price pressures is certainly a welcome development, but a sustained downward trajectory will be needed going forward if the Fed and the bond market are to be convinced that the inflation dragon has been slayed.
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