Payden & Rygel: Jeffrey Cleveland on the US CPI
By Jeffrey Cleveland, Chief Economist, Payden & Rygel
Well, the good news, goods prices were a bit softer than expected. So, there’s been this fear for months now that we’re going to see a huge pass through the consumer prices from tariffs via goods. And we’re not really seeing that.
There’s been a little bit of upward pressure, but nothing too crazy. So, I think that’s good news. The surprising part was that the inflation that we did see showed up in services, namely transportation services, so things like airfare, so that was a bit unexpected. I don’t think that’s a big deal, I think that’s closely tied to the labor market.
The labor market continues to cool, services prices will also cool off. So, I don’t think this changes anything with regard to the Federal Reserve and the next meeting and the rate cuts that we’re probably going to see.
Inflation is a lagging indicator. The Fed’s concern should be, I think, the labor market situation. Inflation will cool off over time. Labor market is slowing now. So, if you think out over the next 6 to 12 months, and we expect a little bit higher unemployment rate, inflation to settle down, I think the answer is rate cuts. The question is how many, and how will that feed through to the rest of the interest rate structure? Of course, a great question.
But if inflation is not a problem, then probably 10-year yields go lower as well. So, you have a potential in the next 6 to 12 months where the Fed cuts 75 or 100 basis points, and then 10-year yields actually end up lower. This does feed through big picture into things like mortgage rates, auto loans, corporate financing, and that ends up being the big story. And then a lot of the other stuff is just noise around the margin.
