“Inflation Has Peaked”: Here’s What To Expect In Today’s CPI Report

With the massively illiquid market poised on the edge of the negative gamma abyss, today’s CPI print could easily crash stocks if the number is above the consensus estimate of 8.1% (for headline, 6.0% for core), or alternatively could spark a huge bear market short squeeze. The extremely binary outcome is why there has been so little conviction and liquidity in stocks in recent days, as few traders were willing to put on material risk ahead of the print.

So what to expect? Here, opinions differ with most forecasting that inflation will have peaked in March largely due to base effects, however, the rate of its decline from here on out is unclear.

Starting first with the skeptics, surprisingly we find JPM economist Michael Feroli with one of the highest estimates – at 0.4% M/M and 8.3%Y/Y, he is above Street consensus (if below last month’s prints of 1.2% and 8.5%). In Feroli’s view that we may have one or more elevated prints before we start to see a significant decline in official measures of inflation.

According to JPM economists, energy prices look to have come off somewhat in April following their March surge, and he believes that the energy CPI declined 0.2% in April. But this decline could be offset by another strong increase in food prices (forecast: 0.8%) and another solid gain for the ex.-food and energy core index (forecast: 0.39%).

While JPM’s headline forecast is above consensus, its core view is below: in April, JPM expects core CPI to drop from 6.5% to a still-strong 5.9%. Here, Feroli says that while “price increases for the rent measures have been solid lately, helping push headline and core inflation higher” he thinks April increases were similar to the rent trends, with tenants’ rent up 0.47% and owners’ equivalent rent rising 0.43%. While that may be true, it is now clearly the case that asking rents have peaked and are declining on a Y/Y basis as the following chart of data from Apartment List shows. However, since the BLS owner’s equivalent rent series lags about 5-6 months, we may still see some residual increases in April and/or May. In any case, those seeking real-time trends, we have clearly hit an inflection point and the coming sharp slowdown in US consumption and/or recession, assures that within a few months, rents will stop growing on a Y/Y basis.

Besides rents, vehicle prices have also cooled after an earlier surge, with price increases for new vehicles moderating in recent months and used vehicle prices turning lower.

In the April CPI, JPM expects more of the same with new vehicle prices edging up 0.1% and used vehicle prices declining 2.0%. (BLS is changing its methodology starting with the April data to estimate new vehicle prices directly from transaction data from J.D. Power.)

Compared to JPM, Bank of America is somewhat more cheerful, and looks for core CPI to rise 0.3% mom in April, which would reflect a similar increase as in March and would come in below consensus expectations of 0.4%.  Due to significantly unfavorable base effects, this would result in a sizeable cooling off in yoy inflation to 5.9% from 6.4% in March.

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