By coinnews 
00:00 Speaker A
Just want to get your initial read here on the CPI report this morning.
00:04 Speaker B
Yeah, it came in a little bit soft. So 24 basis points month on month. We were looking for 0.27, so really not that that different. I think the key thing for everybody to keep in mind is the tariff impact hasn’t really played out yet. So that should happen in the next couple of months. That said, the good news is, of course, the tariffs are a lot lower than we initially anticipated. So, as of now, you are still seeing some weakness in services, so that’s something to keep an eye on. It does suggest that, certainly on the travel side, the consumer is a little bit softer here. And then the good side, it was a little bit mixed, but overall the net net was was a little bit soft. We should expect that to change in the next couple of months. I think the key thing that the the report brought to light is that the consumer on the travel side is certainly a little bit weak.
00:57 Speaker A
Let’s go into that then. Where was there evidence of any of the trade wars impact coming up already in this CPI print?
01:06 Speaker B
Toys were a little bit firm at 0.3, some of the other goods prices that come from China were a little bit firm, but it really wasn’t all that strong. The thing to keep in mind is that retailers have inventory of several weeks, uh, often up to up to about two months. So the real tariff impact from April second totally has not made its way onto shelves. So that’s when we anticipate it to actually feed into consumer prices. As of now, they’re selling pre-tariff inventory, which shouldn’t have an effect from a price perspective.
01:46 Speaker A
And so all those things considered, how much of the kind of tariff effect do we expect to make its way through, as we know that there have been some of the measures that companies have been taking, saying they’re not going to take on that tariff cost and they’re having some of the inventory just sit out not port, uh, until they know that some of the rates have decreased. And we’ve started to see at least the pauses temporarily for 60 to 90 days at this juncture. And what that could essentially mean for the flow-through to prices from your best estimation.
02:30 Speaker B
The main conclusion from lowering the tariff rates to a more sustainable level is that companies will try to pass through most of the costs. Because now we don’t have a consumer that’s likely facing the potential recession. The economy should be okay this year, which means companies are going to try to pass through as much as they can because they don’t want to take the margin hit. And to the extent that the consumer’s holding up, they might be able to actually eat a lot of that cost. So that’s certainly good news for for company margins, which is one reason why the the equity market’s reacting so positively.
03:15 Speaker A
So where does that leave the Fed then? If we will see more of that pass through in costs lead to higher inflation going forward.
03:25 Speaker B
Yeah, I mean, the market’s pricing in two cuts for the Fed. We still officially have that in our forecast. The risk is certainly that there is fewer cuts. If we’re sitting here in in Q3 or Q4 of this year, and the economy is holding up quite well, and inflation is elevated, there’s not a great reason for them to be cutting. They’re probably going to want to just wait it out. They were only going to be cutting if we saw a substantial rise in unemployment rate, which, if the tariff impact isn’t that large, there’s not a great reason for companies to be doing big layoffs.
04:08 Speaker A
And so with that in mind, as you’re thinking through the company, uh, company specific movements that they’re making, but then additionally on the Fed side, just to continue that frame of mind as well here, what and how long of a trend would they be looking for in the data points that they’re monitoring on the inflationary side, and on the other side of the mandate, on the employment side?
04:42 Speaker B
Yeah, so they’re expecting it might, it could take a couple of months for it to really pass through. So I would say, if it lasts for more than three to four months, I think we have to start wondering to what extent, uh, this is going to going to be a little bit more persistent. I think that’s probably going to be the case. We’re likely to see more persistent inflation, partially because there’s going to be second order effects. So if you think back to what happened after COVID, not only did used vehicle prices go up, but then motor vehicle insurance picked up later. So there might be other parts of the the data that might have an effect that we’re not necessarily anticipating, and that may take longer to actually pass through into the CPI print.
05:33 Speaker A
It makes me wonder, too, how you’re thinking about something that has been a trend for a while, which is shelter’s contribution to CPI was obviously one of the major contributors to this one, even though it was the smallest increase in inflation since February of 2021 on a yearly basis here. But housing is such a sticky part of inflation. So how do we get to the Fed’s 2% goal with shelter prices still high?
06:07 Speaker B
Yeah, and it’s we’re not going to get to the Fed’s 2% goal in in the near term. We’re likely to be sitting with inflation closer to 3%. The expectation was that shelter should come down, and we still expect that should be the case, largely because what’s happening real time in market, it’s in the rental market is that prices have have slowed down quite a bit. It hasn’t been reflected in CPI, so there’s still this lagged effect where where OER and rent should come down. The thing is the tariff impact should more than offset that. So we’re we’re unlikely to be talking about 2% inflation this year. That’s just not the reality. So we’re not going to be at the Fed’s target. The only reason they would be cutting interest rates is because the economy is softening, certainly not because inflation is missing their forecasts.