Two the Point — The January Consumer Price Index Report

This week we discuss the January Consumer Price Index report, highlighting its subtle complexities and the implications for future Federal Reserve actions. Watch for insights into how these dynamics play into our long-term investment strategies.

Key Highlights:

• January CPI Increase: The overall CPI rose by 0.3% month-over-month and 3.1% year-over-year, while the core CPI (excluding food and energy) increased by 0.4% month-over-month and 3.9% year-over-year.
• Shelter Costs Impact: Shelter costs contributed significantly to the CPI increase, accounting for about two-thirds of the total rise.
• Disinflation Narrative Continues: Despite the uptick, broader disinflation trends persist, backed by softening wage growth, rising productivity, ongoing goods disinflation, and falling inflation expectations.
• One-off Items in January: The CPI was influenced by unusual factors such as higher seasonal adjustments and a significant rise in medical care services, the largest since September 2022.
• Owners’ Equivalent Rent (OER) vs. Primary Rent: The difference between OER and actual rent trends, with an expectation that OER will align with the slowing primary rent increases.
• Market Reaction to CPI Report: The market’s response led to a reevaluation of anticipated federal funds rate cuts, with the 12-month futures suggesting fewer and later rate cuts than previously expected.
• Fed’s Rate Cut Expectations: Our perspective aligns with an expectation of approximately three rate cuts in 2024.
• Investment Outlook: Emphasis on a steady investment environment and the potential for long-term growth, without advocating for rapid or excessive rate cuts by the Fed.