CPI Offers a Sentiment Check

There is no perfect way to assess investor sentiment, but here is a good one: monitoring headlines’ take on long-running fears. Thursday provided investors a handy check-in on this front courtesy of the reaction to July Consumer Price Index (CPI) inflation data. Headline inflation reaccelerated a smidge, from 3.0% y/y in June to 3.2%.^[i] Yet beyond some concerns about higher gas prices fueling (sorry) a broader inflation resurgence later this year, the report didn’t generate much angst. Where six months ago pundits would have dug deep for a dozen reasons a reacceleration was super-bad news, this time they brushed the uptick off as base-effect skew, extrapolated this to a Fed pause in September, and moved on. We wouldn’t call this optimistic, but it strongly suggests inflation is losing its grip on sentiment.

In a way, coverage of the report itself was almost too dismissive. Almost. Blaming the small acceleration on the base effect rightly acknowledges that the sharp CPI slowdown last July distorts the year-over-year comparison a bit, but it doesn’t fully explain July 2023’s rise. After all, CPI rose 0.2% m/m from June.^[ii] This can’t stem entirely from July’s rising gas prices, as core inflation, which excludes food and energy, also rose 0.2%.^[iii] Yet headlines correctly pinned this on shelter costs—primarily owner’s equivalent rent—and acknowledged these tend to move at a lag and should be more of a disinflationary force later this year. Seems right to us, as does the view of the report as more improvement on the inflation front overall. Excluding food, energy and shelter, prices fell -0.1% m/m, and broader core inflation slowed from 4.8% y/y to 4.7%.^[iv]

Good enough, according to most observers, for a Fed pause. The fact that this is the primary lens through which folks chose to view inflation suggests to us things are trucking right along—this is how headlines have assessed pretty much every economic release this year. But inflation used to be its own special thing, with pundits weighing its alleged inherent economic impact as well as its economic implications. Now we seem mostly past the high prices will crush consumer spending wave—notwithstanding the aforementioned concerns about a more lasting, albeit mild relative to 2022, inflation rise—and are just riding the normal what does this mean for the Fed train. Which always strikes us as a little curious, considering the public has just gotten a two-year-long lesson that monetary policy is unpredictable. There is zero way to know how any one Fed person will view the latest inflation data and outlook, never mind how the whole crew will see things and vote. As always, we shall have to wait and see.

In the meantime, we suggest enjoying the break from hyperbolic economic news coverage, which has been one of the nicest aspects of the nascent enthusiasm for a so-called soft landing. The heightened tone and colorful adjectives in the past two year’s inflation commentary were grating, and it wouldn’t surprise us if all this angst-ridden coverage impacted as well as reflected sentiment. We aren’t arguing coverage is suddenly sunny. But it does seem calmer and perhaps the relative calm will have a similar effect, tacitly encouraging investors to keep moving on. To us, that is the right move. Stocks look to the next 3 – 30 months and expected earnings over that stretch, after all, so investors are generally best off doing the same rather than looking back to yesterday’s fears.