CPI and CCAR

Episode Summary

Executive Summary: The episode centered on a hotter-than-expected January CPI and PPI, with special focus on shelter/owner’s equivalent rent, vehicles, and medical care. The hosts argued inflation is still easing on trend, but January’s data and the Fed’s new stress-test scenarios keep policy uncertainty elevated. Commercial real estate was also discussed as stabilizing, with doom-loop fears fading nationally.

Main Topics: January inflation came in hot (Priority: 5/5): The January CPI and PPI both surprised to the upside, driven by shelter, medical care, and some goods categories. The group debated how much is noise versus a sign that disinflation is stalling. Owner’s equivalent rent and shelter measurement (Priority: 5/5): A deep dive into why shelter inflation is still running hot despite soft private rent data. The discussion emphasized BLS measurement lags and imputation issues, especially across different housing submarkets. Vehicle prices and related insurance costs (Priority: 4/5): New vehicle prices were flat, used vehicle prices fell sharply, and motor vehicle insurance continued to surge. The panel expects vehicle-related inflation to ease, though insurance may lag. Medical care inflation as a rising pressure (Priority: 4/5): Medical care inflation accelerated in January and may add upward pressure to CPI and PCE in coming months, potentially complicating the Fed’s path back to target. Fed CCAR stress tests and banking risk (Priority: 4/5): The Fed released its annual stress tests late and added two exploratory funding-stress scenarios, widely seen as a response to last year’s banking turmoil. The tests aim to probe resilience without changing capital planning. Commercial real estate stabilization (Priority: 3/5): The hosts said CRE doom-loop fears are fading, with price declines likely behind the market at a national level, though some cities and property types still face stress. Fed policy timing debate (Priority: 5/5): The panel debated whether the Fed should cut in May, June, or sooner. Mark argued for an immediate start to cuts, while others preferred waiting for more confirmation that inflation is truly under control.

Key Arguments: The January inflation print looks hot, but much of the move may reflect seasonal noise and lagging shelter methodology rather than a reacceleration in underlying inflation. Shelter inflation should cool over time because market rents are weak, but the BLS owner’s equivalent rent measure lags and can diverge from observed rents for long periods. Vehicle-related inflation should moderate as supply normalizes, though insurance inflation remains elevated because it responds with a lag to earlier vehicle and repair price spikes. Medical care inflation may be a genuine source of upward pressure in both CPI and PCE, making a near-term downside surprise in core inflation less likely. The Fed’s exploratory CCAR scenarios appear designed to test bank resilience to funding stress and recession after last year’s SVB episode, but they are not part of capital grading. Commercial real estate is still under stress, but the risk of a national doom loop or systemic banking crisis is now viewed as low. Mark Zandi argued the Fed should begin cutting now because inflation is near target, labor markets are softening, and keeping rates high risks an avoidable policy mistake. The group broadly agreed the 2021-2022 inflation surge was driven more by supply shocks than by pure demand, though fiscal stimulus and excess savings likely played a role. Chris Dorides and Marissa Di Natale emphasized that the Fed should be patient, but acknowledged the risk of waiting too long if disinflation continues and growth slows.

Data Points: CPI monthly change (January): +0.3% - Headline CPI rose more than the expected +0.2%. CPI year-over-year: 3.1% - Headline inflation eased from 3.4% but remained hot due to shelter. Core CPI monthly change (January): +0.4% - Stronger than the expected +0.3%. Core CPI year-over-year: 3.9% - Stayed elevated after the January report. CPI excluding shelter: 1.6% y/y - Used to illustrate that inflation outside housing is close to target. Owner’s equivalent rent: +0.6% m/m in January - Re-accelerated from +0.4% in December and drove much of the shelter miss. Energy CPI: -0.9% m/m - Third straight monthly decline, helped by lower gasoline and still-soft energy inputs. Gasoline prices in CPI: -3.3% m/m - Lower gasoline prices were a key drag on the energy component. Food at home: flat-ish / modestly softer trend - Discussion emphasized easing grocery inflation and falling egg prices. Food away from home: +0.5% m/m; +5% y/y - Dining out remained inflationary due to labor-intensive costs. New vehicle prices: 0.0% m/m; +0.7% y/y - Supply constraints have eased, suggesting limited inflation ahead. Used vehicle prices: -3.4% m/m - Largest monthly decline since the late 1960s, though affected by methodology changes. Motor vehicle insurance: +1%+ m/m; +20.6% y/y - A persistent pain point linked to earlier vehicle and repair cost spikes. Medical care inflation: +0.5% m/m - Rose for several months in a row, signaling potential upside pressure. Import prices: +0.8% m/m; -1% y/y - The week’s stats-game number; a volatile but relevant external inflation signal. Cleveland Fed median CPI: +0.53% m/m; 5.7% y/y - A sticky-price measure that accelerated in January. Housing permits: +8.6% total; single-family +35.7%; multifamily -26.6% - Used in the stats game to show strong single-family activity and weaker multifamily construction. Semiconductor industrial production: +2.2% m/m; +20.6% y/y - Illustrated booming chip output, likely boosted by AI demand. Commercial real estate prices (equal-weighted index): modestly higher in Q4 2023 - Suggested the worst may be behind CRE on an equal-weighted basis. Commercial real estate prices (value-weighted index): more severe declines, but stabilizing - Larger central-city assets still under pressure. CCAR exploratory scenarios: 2 new scenarios - Fed added funding-stress scenarios alongside baseline and severely adverse tests. Banks in CCAR: 32 banks - Number of institutions subject to the annual stress test. Commercial real estate stress-test price decline: ~40% - The severe adverse scenario’s CRE price drop was said to be similar to last year. Owners equivalent rent data limitation: 16% of census block groups have less than 10% rentals - Illustrated why housing-service imputation can mis-measure shelter inflation.

Pivotal Quotes: "The threat is abating, at least in terms of this idea that we're going to go into a doom loop." — Mark Zandi: On commercial real estate risks and whether CRE could trigger a broader economic or banking spiral. "What do you want exactly? What's your bar?" — Mark Zandi: On why the Fed should consider cutting rates now given inflation near target and signs of labor-market softening. "I think there is risk in the other direction, lower." — Chris Dorides: On the possibility that inflation could undershoot rather than remain elevated if demand softens.

Implications: Listeners should expect more debate over the Fed’s first rate cut as inflation data stay noisy but trend cooler. CRE stress looks manageable nationally, but shelter, medical care, and insurance remain key inflation watchpoints.