Today's inflation numbers

Episode Summary

Executive Summary: The Unhedged podcast hosts Katie Martin and Ethan Wu analyze the December CPI report, finding inflation sticky but with some encouraging signs in core services like car repairs. Bond markets have reversed from a 5% yield peak to 4%, reflecting optimism that the Fed may cut rates in 2024, though the data suggests a bumpy road ahead. The hosts also discuss specific categories like shelter inflation remaining high and goods deflation ending, concluding that the Fed remains data-dependent.

Main Topics: CPI Inflation Report Analysis (Priority: 5/5): Detailed breakdown of the December CPI data: headline year-on-year at 3.4% (above expectations of 3.2%), month-on-month at 0.3% (up from 0.1%), core rate at 3.9% with a marginal decline from November. Shelter Inflation Puzzle (Priority: 5/5): Shelter inflation rose 0.5% in December, defying expectations of a sharper decline based on private market rent data from Zillow and Apartment List, which have been falling for nearly a year. Bond Market Volatility (Priority: 4/5): US Treasury yields peaked at 5% in summer 2023, then crashed to 4% or lower after the Fed signaled potential rate cuts. The market remains data-dependent and volatile, with no clear direction. Goods vs. Services Inflation Dynamics (Priority: 4/5): Goods deflation ended in December (0% month-over-month), while services inflation showed some improvement in categories like car repairs (-0.25% first decline since March 2022). However, overall services remain sticky. Soft Landing Prospects (Priority: 3/5): The hosts discuss whether the US economy will achieve a 'soft landing' as inflation gradually cools without a major recession, noting that recent data suggests the process is slow.

Key Arguments: Inflation is not snapping back like a rubber band but is also not going away quickly, with year-on-year CPI at 3.4% versus expectations of 3.2%. The end of goods deflation removes a significant tailwind for the Fed's inflation fight, potentially making further progress harder. Shelter inflation remains stubbornly high due to lag effects from private market rents, which have been falling for almost a year but have not yet fully transmitted to CPI. Bond markets overreacted to the Fed's December pivot, pricing in too many rate cuts prematurely; the December CPI data caused yields to edge back up, suggesting a correction. The Fed and markets are both 'data dependent,' living from one data point to the next, with no clear long-term direction for yields. Services inflation, especially in sticky categories like car repairs and shelter, remains the most concerning area for the Fed and is expected to decline only slowly.

Data Points: Year-on-year CPI: 3.4% - December reading, above market expectations of 3.2% and up from 3.1% in November. Month-on-month CPI: 0.3% - December reading, up from 0.1% in November. Core CPI (year-on-year): 3.9% - December reading, down slightly from November. Shelter inflation (month-on-month): 0.5% - December reading, roughly on par with most of 2023. Car repair prices (month-on-month): -0.25% - First decline since March 2022, a potentially good sign for services inflation. Goods deflation (month-on-month): 0% - December reading, ending a period of falling goods prices that provided a tailwind to the Fed. 10-year US Treasury yield peak (2023 summer): 5% - Yield peaked at 5% then crashed to 4% or lower after the Fed's December pivot. 10-year US Treasury yield: Just below 4% - Current level after the December CPI release. Tinder Select subscription fee: $499 per month - Mentioned in the 'Long Short' segment as a high price point for dating app monetization.

Pivotal Quotes: "It all just tells you that inflation, it hasn't gone mad again. We're not back in the bad old days, but it is just not going away." — Katie Martin: Summarizing the mixed message from the December CPI data. "We're all just living from one dollop of numbers to the next dollop of numbers. And that's the only way that you can trade these days." — Katie Martin: Describing the current market environment of high data sensitivity after the CPI release. "I'm uncertain how much certainty there is." — Katie Martin: On the challenge of predicting the direction of bond yields given ongoing inflation uncertainty.

Implications: The CPI data suggests the Fed will be cautious about rate cuts, likely delivering fewer than markets priced in. Bond market volatility will persist as investors remain data-dependent. The slow decline in shelter inflation and end of goods deflation mean the 'last mile' of inflation reduction will be the hardest, potentially delaying a soft landing.