The stock market will likely shift its focus to the start of Q124 corporate earnings releases (which are likely to be strong and a market positive), as the Middle East situation appears to be stabilizing. Oil prices will be an important monitor of the "temperature" in the region. A decline would signal an easing in the region's tensions -- a positive for stocks. Oil prices would need to stay high for awhile to have a significant impact on the US economy -- lifting inflation and hurting growth. So, the Fed should also just watch the situation and not react to it. Away from the Mideast, the Fed should think twice before changing policy intentions as a result of the high March CPI. The high print can be attributed to factors that are independent of aggregate demand or monetary policy.
The CPI measures price changes that could reflect inflationary pressures and/or relative price changes. The latter results from factors specific to the demand/supply of an item and not an issue for monetary policy. The culprits behind the higher-than-consensus 0.4% m/m increase in the Core CPI -- Motor Vehicle Insurance and Motor Vehicle Repair -- could be such industry-specific relative price changes. If they had increased at the same rate as their prior 3-month averages, the Core CPI would have printed the consensus 0.3%. If they were unchanged in March, the Core would have printed 0.2%.
According to news stories, "extreme weather, driving habits and high repair costs" have been behind the sharp increase in auto insurance rates. Motor repair costs have soared because /1/ modern cars are more complex, /2/ ongoing supply chain issues, /3/ shortages of trained technicians, and /4/ older cars need more repair work, made more important by the shift to used car sales. These reasons suggest that at least some of the recently large increases in these components can be considered a result of factors specific to these industries.
The jumps in Motor Vehicle Insurance and Repair in March could be one-offs and thus noise. From a wider perspective, there always will be noise in the measurement of the CPI. The real problem with the March Core CPI is that it would have been above the Fed's desired pace of 0.2% m/m even if these two components had risen in line with their recent trends.
The Fed's goal is presumably to get noisy elements to push the CPI around a 0.2% m/m trend-line rather than 0.3%. It's encouraging in this regard that more than half of the CPI components printed 0.2% or less in March. However, it is still problematic that the largest CPI component, Owners' Equivalent Rent (OER), is trending 0.4%. It may have to slow to 0.2-0.3% to lower the Core CPI trend to 0.2%. This may happen yet, particularly if the CPI survey finally picks up the flattening in rent seen in private surveys.
There are two ironic aspects of OER: /1/ It is an imputed price, based on the CPI rent survey. It measures what homeowners would pay if they rented their home. Homeowners don't actually pay it. This may be the reason why Fed Chair Powell highlights Core Inflation Less Shelter. Why should the Fed restrain the economy for a price nobody pays? /2/ Fed tightening can shift housing demand from ownership to renting, thereby pushing up rents. So, it is questionable that Fed policy can do much to slow OER short of weakening the overall economy.
With all the many specific factors impacting the components of the CPI and the largest component, OER, being more theoretical than real, Fed policy may do best by focusing on the broadest factor impacting prices -- labor costs. So far, they appear to be in line with the Fed's inflation goal, taking account of productivity growth. They argue for steady monetary policy at this point. And, they keep open the door for Fed rate cuts if economic growth weakens.
The Atlanta Fed model's latest estimate of 2.4% for Q124 Real GDP Growth is slower than the 3.4% Q423 pace -- which is a positive for the Fed but not weak enough to warrant rate cuts. The questions now are the strength and duration of a post-winter bounce in Q224. At this point, there is not enough evidence to answer these questions. So, Fed rate cuts remain hypothetical.
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