Weekly Market Review: Favourable dynamics to continue

 Last week’s (February 25) January CPI report came in above expectations, with headline CPI rising 0.3% m/m and 3.1% y/y. Shelter prices, which increased 0.6% in January, accounted for over 2/3 of the monthly increase in headline CPI. 

Excluding food and energy (core), CPI increased 0.4% m/m and 3.9% y/y, with the core services categories driving much of the increase. The core services index, which includes shelter, medical care services and transportation services, increased 0.7% m/m – a notable acceleration from a monthly gain of 0.4% in December. Despite the increase in overall CPI, there were continued signs of cooling in core goods, where prices fell 0.3% in January. 

While the January CPI report was hotter than expected, a healthy labor market has driven wage growth and in turn kept real wages, which is defined as nominal wages less inflation, positive. As we show in this week’s chart, since the start of 2023, the growth in average hourly earnings for private employees has outpaced the growth in headline CPI.

Looking ahead, we expect this favorable dynamic to continue due to the resilient nature of the labor market and the broader cooling in inflation and therefore support consumption. Despite the monthly accelerations in headline and core CPI growth, the y/y headline CPI rate moderated to 3.1% versus 3.4% last January, with the core CPI rate staying unchanged. As such, we maintain our view that the Federal Reserve will begin lowering rates in June, with additional economic data in the coming months to reiterate the broader disinflation we have seen over the last 12 months.-JP Morgan