Data Story
We have been beating this drum over the last 6 months. Real-time data supported the notion that inflation peaked half a year ago and that price stability was on the right track.
More people are starting to acknowledge the lag between market based rents, and how that shows up in inflation reports. The main conclusion is that these inflation reports are heavily lagged, and lagged information is dangerous when things move fast. At the end of the day, this is why the FED was late in the first place.
That is beside the point here.
The main detail today is that the rise of inflation is mostly gone.
Piper states:
"If the CPI only measured market rents, core inflation would already be close to 2%, said Mr. Oubina. Given the lags, the drop in market rents “portends a significant deceleration in CPI rent measures,” he said. The Fed’s 2% target is based on the Commerce Department’s price index of personal-consumption expenditures (PCE), which assigns half the weight to shelter that the CPI does. Nonetheless, Mr. Oubina predicted the slowing in rents to date is enough to reduce core PCE inflation to 2% by the second half of next year." - WSJ
Potential Investment Implications
The conclusion is clear. If inflation is stable, the FED should be very close to the end of rate hikes. If rate hikes are done with, corporations can optimize using a stable cost of capital.
If the FED does NOT realize the incredible lag, we could undershoot their 2% inflation target. Meaning we are back to pre-covid monetary policy. An environment highly supportive to assets.
Disclaimer: See the disclaimer page. Not a recommendation to purchase or sell any securities mentioned.