Debating Inflation Significant Digits

Episode Summary

Executive Summary: The episode centers on the hotter-than-expected March CPI report, which showed core inflation accelerating largely because of auto insurance and related vehicle-repair costs, even as many cyclical goods prices eased and shelter continued to slow. The hosts argue this CPI upside likely overstates underlying inflation because the Fed focuses more on PCE, where auto insurance looks far softer. They also discuss oil’s recent rise, likely summer gasoline pressures, election sensitivity to gas prices, and what the data mean for Fed timing, now leaning toward a first cut in September.

Main Topics: March CPI surprise and the inflation miss (Priority: 5/5): March headline and core CPI both rose 0.4%, above forecast, with the core miss driven mainly by auto insurance. The hosts stress that the CPI print was disappointing, but not necessarily a sign of broad inflation reacceleration. Auto insurance as the main CPI distortion (Priority: 5/5): Auto insurance jumped 2.6% and, along with vehicle repair costs, explained most of the forecasting error. The group argues this category is large enough to matter but too volatile and lagged to imply a broad inflation surge. CPI vs. PCE and measurement differences (Priority: 5/5): The conversation contrasts CPI with the Fed’s preferred PCE deflator, noting that the PPI-based auto insurance input for PCE rose only 0.1%, suggesting the CPI’s insurance spike may not fully carry through to the Fed’s target measure. Housing and shelter remain sticky (Priority: 4/5): Shelter inflation slowed only modestly, with the hosts debating why housing-services inflation remains persistent relative to market rents. They argue OER is methodologically problematic and may obscure the true underlying inflation trend. Oil prices, gas prices, and summer seasonality (Priority: 4/5): Energy prices have risen meaningfully, with oil in the high 80s and gasoline around $3.63/gallon. Chris argues seasonal crack-spread widening plus geopolitical risk could push gas near or above $4 in some states, though oil may peak soon. Fed outlook and rate-cut timing (Priority: 4/5): The hotter CPI pushed market expectations for the first rate cut from June toward September, with some chance of December. The hosts think the Fed wants several months of clearly softer inflation before cutting. Labor market, wages, and business sentiment (Priority: 3/5): The Atlanta Fed wage tracker eased to 4.7%, which is encouraging but still inconsistent with 2% inflation. Meanwhile, NFIB small-business sentiment is very weak, though the panel notes these survey measures can be politicized.

Key Arguments: The 0.4% core CPI print was mostly a vehicle-insurance story, not evidence of a broad inflation breakout. Auto insurance in CPI has a large enough weight to move the monthly core number meaningfully, but it should ease as vehicle prices normalize. Core PCE is likely to come in around 0.3%, softer than CPI, because the PCE measure for auto insurance is far weaker than the CPI counterpart. Shelter inflation remains the biggest structural obstacle to disinflation, but the hosts believe it is still gradually moderating. Market expectations for Fed easing have been pushed back; a September first cut now appears more plausible than June or July. Oil-price risks are real, but U.S. shale, still-profitable drilling economics, and OPEC spare capacity should cap the upside over time. Higher gas prices may have political consequences, but the model is sensitive and could flip if gasoline averages above roughly $4.09 for long enough.

Data Points: Headline CPI (March monthly change): 0.4% - Higher than the 0.3% consensus forecast; described as disappointing. Core CPI (March monthly change): 0.4% - Higher than the 0.3% consensus and the team’s 0.2% forecast. Headline CPI (12-month rate): 3.5% - Rose from 3.2% in 2024; partly affected by base effects. Auto insurance CPI (March): 2.6% - Largest contributor to the core CPI forecast miss. Vehicle repair/insurance-related forecast miss contribution: About half of the CPI forecast miss - Matt attributes most of the miss to auto insurance and related costs. Used vehicle prices (March): -1.1% m/m - Fell in March and were down almost 2% year over year. New vehicle prices (March): Fell; 5 of past 6 months down - New car prices were roughly flat year over year. Medical services CPI (March): 0.6% - A notable upside surprise; labor-intensive healthcare expected to remain sticky. Shelter inflation trend: 0.5% to 0.4% - Still moderating, but slowly; remains the largest component of CPI change. Harmonized core CPI ex-OER (YoY): 1.9% - Used to argue underlying inflation is closer to/below target excluding housing services. Core PCE deflator estimate for March: 0.3% - Early estimate based on CPI and PPI inputs. PPI auto insurance (March): 0.1% - Used as the PCE-relevant comparison, far below CPI auto insurance. Atlanta Fed wage tracker (March): 4.7% - Three-month moving average of annual wage growth, down from 5.0% in February. Mortgage rate mentioned in stats game: 7.37% - Signals higher borrowing costs after the CPI-driven bond selloff. National gasoline price: $3.63 per gallon - As of April 11, before expected seasonal rise in summer driving season. Potential summer gas increase: 20 to 30 cents per gallon - Attributed to widening crack spreads. States above $4 gas in prior midterm comparison: 24 states - Used to discuss election implications of high fuel prices. Election model tipping gas price: $4.09 per gallon - Sustained average above this level could flip the presidential forecast in the model. WTI oil price range mentioned: Mid-80s to around $90 - Current prices compared with the low 70s a year earlier. Dallas Fed Permian break-even WTI price: $70 per barrel - Up from $66 in the prior survey, still below prevailing prices. U.S. oil production increase in 2023: About 1 million barrels per day - Driven by shale producers and drilled-but-uncompleted wells. U.S. oil production level: Over 13 million barrels per day - Described as a record high and the largest national output on the planet. Saudi oil production level: Around 9 million barrels per day - Reduced from earlier levels due to OPEC cuts. Drilled-but-uncompleted wells inventory: Record low - Inventory depletion reduces a key source of U.S. supply growth. OPEC spare capacity: Above 5 million barrels per day - Seen as historically high and a cap on further oil price increases. Market pricing for Fed cuts after CPI: June cut down to about 20% probability - Shifted toward September and December cuts after the hot CPI print.

Pivotal Quotes: "The biggest is auto insurance." — Matt Collier: Explaining why the team’s 0.2% core CPI forecast missed badly. "I think the best measure of that is core harmonized, the harmonized core CPI." — Mark Sandy: Arguing that a harmonized CPI excluding owner’s equivalent rent is a better gauge of underlying inflation. "The cure for high prices is high prices." — Chris Dorides: Explaining why elevated oil prices should eventually encourage more U.S. production.

Implications: Inflation remains sticky enough to delay Fed cuts, but the CPI overshoot may be exaggerated by volatile insurance and shelter measures. Gas prices likely rise seasonally, adding political and consumer pressure, while underlying disinflation still appears intact enough for easing later in 2024.