May CPI: Inflation data is 'likely to add to' market complacency
New Century Advisors chief economist Claudia Sahm and RSM chief economist Joe Brusuelas join Morning Brief with Madison Mills and Brad Smith to take a closer look at the economic data and the market's reaction.
Sahm also served as a Federal Reserve Board economist and is the creator of the central bank's Sahm Rule recession indicator.
To watch more expert insights and analysis on the latest market action, check out more Morning Brief here.
And do you think this softness that may have been indicated by the headline numbers is to be believed?
I think it it can very well be an accurate picture of where we are as of last month. It's not necessarily really telling us where we're headed by the end of this year. And that's a big question is exactly how these tariff costs, which we know they're being collected, we see them in the treasury statements, where are they going to go? Showing up in CPI is not the only place that they can go, but it's it's really too soon to be saying we're, you know, clear path back to, you know, 2% inflation.
So Claudia, with that in mind, it seems like the prevailing thought in the markets at least is that the worst of the unknown in terms of some of the tariff negotiations and and policy talks, that seems to be behind us. So what would that signal for the back half of this year, especially as we're waiting for some of those deals to net out and how long the tariff overhang could start to bleed through in a more powerful sense into some of these numbers?
Right, well, again, even even with where the tariffs are right now, you know, the level they're at, which is much lower than some levels we had seen earlier this year, they're still six times what they were before we came into this year. We still have an adjustment. Adjustments take in the real world, adjustments take time. And businesses have made, you know, took efforts, built up some inventories, tried to, you know, slow things down. So again, I don't think we have a picture yet of what the costs really are from the current policy yet, even if that policy doesn't get any worse.
And Joe, it makes me wonder whether we as investors is Wall Street sort of past the point of being too concerned about tariff policy. We're also having some tariff headlines crossing this morning, the president saying the deal with China is done. But we saw futures hitting session highs off the back of the inflation data. Is the market back to focusing on the inflation data primarily?
No, this is likely to add to the complacency in a market that's pressed for perfection right now. My sense is is when I look at this, I see some good things. Ex-food energy shelter, inflation was flat and it's up 1.9%. This is a function of the really heavy lifting done by the Fed over the past several years. However, again, when your effective uh tariff rate is is over 15%, you're going to see some pass throughs. It's just a matter of time. When I look at the inflation report this morning, I see on a year-ago basis, services are up 3.7%. Housings up 4% and shelter's up 3.9%. We're back within ranges that I think are tolerable, but I'm not expecting uh much improvement in that in those uh indices. Again, what I'm really worried about is going forward is the impact on goods prices, more importantly, the impact on food prices. Notice that food prices were up and we know the Federal Reserve is now beginning to take a much closer look at food prices and near-term increasing the pass-through from these tariffs. And I think that's something that we all want to focus on given where the market what the market wants, which is rate cuts, and what the Fed's likely to do, which is not give them those rate cuts. At this point, we'll be lucky if we get one this year, perhaps in December, should we really see inflation become transitory, and it's just too early to make that call.
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