Morgan Stanley with the note.
A key component to watch on Wednesday will be rents. Housing inflation comprises 40% of core CPI and 18% of core PCE, so wherever housing inflation goes, the whole index will likely follow. By now, most folks in markets know that the BLS takes current rents and essentially spreads those price changes over a couple of quarters. Current readings on rents have been very weak, so a continued fall in the official statistics for the rest of the year seems clear. Indeed, despite the surge in immigration over last year and this, multifamily vacancies are approaching historical highs. In housing inflation lies the clearest signal for the path of inflation – and that path is lower.
Of course, to use the Fed’s words, for the last three months “there has been a lack of further progress” on inflation. For PCE inflation, goods have driven a lot of the increase, and computer software, video tapes, and apparel jointly explain two thirds of the acceleration. The inflation is idiosyncratic, not widespread. In fact, using weights from CPI, core goods inflation was negative for two of the past three months, with scope for more outright declines. Supply chains have essentially recovered, and 1Q GDP data showed an inventory correction, and the news from China is about more investment and exports in the context of over a year of deflation.
