NEWS AND INSIGHTS | INSIGHTS

CIO Notebook: Inflation Takes a Back Seat to Jobs as the Fed Readies Cuts

September 11, 2024
Shannon Saccocia, CFA, Chief Investment Officer—Private Wealth

It appears the Fed has the confirmatory data in hand to enact more accommodative policy, but it perhaps lacks the justification it would need to meaningfully frontload the cuts expected between now and mid-2025.

August’s U.S. CPI was released today with U.S. headline CPI up +0.2% month-over-month and up +2.5% year-over-year, in line with expectations. Core CPI came in a bit hotter than consensus, up +0.3% month-over-month and up +3.2% on a year-over-year basis versus expectations for +0.2% and +3.2%, respectively.

Shelter was once again the culprit for this slightly steamier core CPI print coming in at +0.5% month-over-month; the measure is up +5.2% year-over-year. Despite evidence of downward pressure on rents in recent months in a number of geographies, this incremental move lower has not yet been reflected in CPI data. In addition, with mortgage rates still multiples higher than they were several years ago, current homeowners remain hesitant to sell their properties while prospective homebuyers are being forced to pay higher prices in order to close a deal in a highly competitive environment. While a new supply of single- and multifamily properties is coming online, undersupply in the decade following the 2008 – 2009 housing market crisis will not be resolved overnight. Given that shelter represents approximately 45% of the core CPI measure, we believe the challenge is likely to persist well after the first few rate cuts.

Outside of the shelter measure, air fares and auto insurance were higher on a month-over-month basis, up +3.9% and +0.6%, respectively. Auto insurance is up a whopping +16.5% on a year-over-year basis—just one example, in our view, of the outsized increases in non-discretionary expenses that have helped to fuel the lackluster consumer confidence readings over the last few months. Food away from home was also higher on the month, up +0.3%. Notable declines were reported in energy costs, as gasoline fell by -0.6% in August and medical care was down -0.1% broadly. Used cars and trucks were down -1.0% in August and are now down over -10% on a year-over-year basis, a marked departure from the immediate post-pandemic recovery period.

Looking ahead to the Federal Reserve (Fed) decision on September 18, it appears the Fed has the confirmatory data in hand to enact more accommodative policy, but it perhaps lacks the justification it would need to meaningfully frontload the cuts expected between now and mid-2025. That said, the specter of an accelerating deterioration in the labor market, likely driven by muted demand resulting from the drawdown of savings coupled with inflation and high borrowing cost fatigue, hangs over the FOMC. Our view is that the Fed likely lowers the fed funds rate by 25 basis points in the upcoming meeting, but opens the door for more meaningful cuts in the next several meetings if evidence of this deterioration is observed.

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