Research Summary
The report discusses the unexpected spike in inflation metrics in January, largely attributed to a surge in Owners’ Equivalent Rent (OER). The Bureau of Labor Statistics’ updated methodology and the strength of single-family housing are considered significant factors. The report also forecasts a modest increase in the 2024 core PCE inflation and anticipates rate cuts by the Federal Reserve. The upcoming February CPI and PPI reports are deemed crucial to confirm the temporary nature of the January inflation spike.
Key Takeaways
Unexpected Inflation Spike in January
- January Inflation Surge: The January CPI and PPI reports showed higher-than-expected price data, with a notable “January effect” causing a temporary spike in inflation metrics. This effect is seen as cyclical and volatile, with the anticipation that sequential inflation will slow down in February, as historically observed.
Significant Surge in Owners’ Equivalent Rent (OER)
- OER Outperformance: Owners’ equivalent rents (OER) surged by 0.56% in January, marking the most significant outperformance compared to the primary rent measure since 1995. This has significant implications for inflation measurement. Despite the OER increase, data from Zillow, Yardi, and Corelogic suggest that single-family rent growth is moderate at around +2pp annualized, explaining less than a quarter of the January OER spike.
Updated CPI Methodology and Single-Family Housing Strength
- Methodology and Market Influence: The Bureau of Labor Statistics (BLS) updated the CPI methodology in January 2023 to give more weight to rents of single-family houses, influencing the OER spike. The strength of single-family housing is also considered a significant factor, with the report forecasting a +4 basis points (bp) increase to the monthly run-rate for the remainder of 2024.
Forecasted Rate Cuts by the Federal Reserve
- Anticipated Rate Cuts: The FOMC statement suggests that rate cuts may begin once inflation shows a sustainable move toward the 2% target. The report forecasts five 25 basis point cuts in the Fed funds rate in 2024, starting in May.
Importance of Upcoming February CPI and PPI Reports
- Crucial Upcoming Reports: The February CPI and PPI reports are crucial to confirm whether the January jump in OER and non-housing services inflation was temporary. The large weight of OER in core CPI (34%) and core PCE (13%) means that its performance can significantly influence measured inflation.
Actionable Insights
- Monitor February CPI and PPI Reports: Given the unexpected inflation spike in January, it is crucial to closely monitor the upcoming February CPI and PPI reports to confirm if the increase was temporary or indicative of a more persistent trend.
- Consider Impact of OER on Inflation: With the significant weight of OER in core CPI and core PCE, its performance can greatly influence measured inflation. Therefore, tracking OER trends can provide valuable insights into potential inflation movements.
- Assess Implications of Potential Rate Cuts: The forecasted rate cuts by the Federal Reserve could have significant implications for various sectors of the economy. It is important to assess these potential impacts and adjust strategies accordingly.
