Two items for “Data” today:
Topic #1: Today’s US Consumer Price Index report and its effect on market expectations for future Federal Reserve monetary policy as well as an analysis of whether inflation causes recession. Four points here:
First, the highlight reel:
- Headline CPI inflation for March came in at 8.5 percent, slightly higher than economists’ 8.4 pct estimate. There had been some buzz about a +9 percent reading going into this morning, so the actual result was “less bad”. Still, at 8.5 percent CPI is running higher than at any point since December 1981 (8.9 pct) – January 1982 (8.3 pct).
- It was the CPI core inflation reading of 6.5 percent that temporarily cheered markets. Why? Because it was scarcely higher than February’s 6.4 percent. This was less of an uptick than we saw in the headline data (7.9 pct last month, 8.5 pct this month).
- Many key categories that consumers care about saw higher inflation than the headline reading: Food (8.8 percent), Gasoline (48.0 pct), Utilities (11 – 22 percent), and new/used cars (13 – 35 percent). Air fares were up 24 percent, a reading consumers will clearly feel as they start to book summer vacation trips.
Second: we see 2 important categories where inflation is accelerating: the aforementioned Food segment, and Owner’s Equivalent Rent (the largest component of CPI, at 24 percent). OER is how the Bureau of Labor Statistics measures inflation in owner-occupied housing. It is a survey-based approach, asking respondents how much they think their house would rent for in the current market. The percent change in those responses over time is “housing inflation”.
The chart below shows Food (blue line) and OER inflation (red line) from 2000 – present. The cost of food is rising at unprecedented rates. The peak you see in the middle of the graph is October 2008, at 6.3 percent versus today’s 8.8 pct. Housing inflation was 4.5 percent in March 2022. You have to go back to the peak of the mid-2000s housing bubble to find similar numbers (4.3 pct in December 2006) and February 2002 to see one that exceeds today’s reading (4.6 pct in January 2002). The momentum in both food and housing inflation is, as you can see from the chart, very strong just now.
Third: turning to how markets took today’s CPI report as well as Fed Governor Brainard’s comments that essentially said, “one month of OK core CPI does not make a trend”, here are current Fed Funds Future probabilities for changes in monetary policy this year:
- Odds for a 50 basis point hike at the May 4th meeting stand at 85 percent, not much different from a day or week ago (84 and 78 pct, respectively).
- Odds of another 50 bps at the June 15th meeting are 69 percent today, also close to yesterday and week ago levels (60 and 63 pct, respectively).
- Futures continue to put heaviest odds that Fed Funds will end the year at 2.50 – 2.75 percent (44 percent today, 40 and 39 percent yesterday and a week ago). The odds of slightly higher rates (2.75 – 3.00 percent) have slipped, however, to 19 percent today from 30 percent yesterday and a week ago.
Lastly, with worries about a US recession increasing, we thought it would be useful to show the relationship between CPI inflation and real GDP growth over time. The following chart tracks inflation (red dashed line) and annualized quarterly GDP growth from 1960 – 2019. We have noted the year of each cycle’s peak inflation readings in red. It is easy enough to see that real GDP growth is inversely related to inflation; every peak in inflation lines right up with the grey recession bars.
Closing out our CPI report review with a macro thought: inflation doesn’t “cause” recession, but the macro events that create inflationary pressures also tend to cause recessions. Chief among these are oil shocks, such as in 1973 – 1974, 1979 – 1980, 1990. The 2000 – 2002 period was a mélange of deflationary pressures (dot com bubble bursting) and inflationary ones (monetary policy response to 9-11, oil prices rising into Gulf War II).
If we get a recession in 2022 – 2023 (not our base case), it will not be because of inflation per se. It will be because a confluence of factors (supply chain snarls and labor market conditions, mostly) overwhelms the Fed’s ability to accurately set interest rates and give the market guidance on future policy. That is not an ideal setup for equity investors, to say the least, but as we always say: you trade the market you have, not the one you want.
Topic #2: US office occupancy seems to be back on track, posting good improvements last week. The data here is from Kastle Systems’ Back to Work Barometer, which pulls information from the company’s security systems at +2,600 buildings and 41,000 businesses on a weekly basis.
The chart on the left in the image below shows office occupancy last week was 43.1 percent, a fresh post-pandemic high. The US’ three largest office markets (NYC, LA, Chicago) all saw improvements, although only LA is above 40 percent. The uptick in San Francisco office occupancy, up 2.4 points to 34.2 percent, is also a good sign given that city’s concentration in tech businesses where work from home has been a more prevalent trend. We are a bit surprised that DC is not faring better (38.9 percent) since the Federal government has been trying to get workers back to the office.
Takeaway: as we often mention when looking at this data, higher office occupancy may be a sign that US labor markets are starting to come into balance. The ability to work from home is a sign that employees have power over their employers, who now generally prefer to see their workers back in the office. Seeing US office occupancy rise – and this trend finally seems solid – could mean that employers are regaining the upper hand to some degree. It will take a few months to see if this spills over into wage inflation.
Kastle Systems’ office occupancy data: https://www.kastle.com/safety-wellness/getting-america-back-to-work/