March CPI released came in “hot” with Core CPI of +0.36% vs Street of +0.30% and this is triggering a sizable sell-off in equities. This is fueling the skepticism of the “inflation is stubborn” cohorts, but as we discuss below, this is a “maximum pain” moment for stocks — that is, today’s reaction is the worst moment of the reaction. Meaning, this is arguably a buy the dip moment.
- Core CPI came in above consensus at +0.36% vs Street of +0.30%. This is a disappointment because this is not really an improvement from Jan and Feb Core CPI (Feb was +0.36% too). After all, we expected seasonality and other distortions to be removed from March. March is the first clean CPI reading of 2024.
- What caused March Core CPI to be “hotter”?
- It was all automobile insurance related:
– Auto insurance MoM soared to +2.58% March
– Feb MoM was +0.85%
– YoY surged to 22.20% vs 20.58% - The surge in auto insurance is still causing upward pressure in Core CPI MoM and YoY. How much?
– CTG (contribution to growth)
– Auto insurance-related March CTG MoM +0.14%
– Auto insurance-related Feb CTG MoM +0.08%
– Auto insurance related was +0.06% higher
– explains entire upside reading vs consensus - Is the fact that auto insurance accelerating a reason to see inflation generally surging? That is not our take. Auto insurance is surging in the real economy because of the prior surges in auto prices and related repairs as well as sloppier driver habits.
– is this something the Fed needs to quash?
– keeping interest rates high will not arrest this
– besides, this is just a timing issue as tweet by @AnnaEconomist shows
– this is a lag to the surge in other auto areas - The tweet shared by @AnnaEconomist highlights the various surges of costs related to autos:
– first, car prices new and used
– second, vehicle parts
– third, vehicle repair
– fourth, now auto insurance
Bottom line: Max pain, but this argues it is a timing issue more than a inflation inflection
Are the Fed and markets going to bother to look at auto insurance and explain away CPI? That is unlikely. We know:
- markets tend to over-react, and today is the example
- today is arguably max pain
- But there are offsets to inflation
- Foremost, U Mich consumer inflation expectations are making multi-year lows
- Why would consumers see lower inflation yet CPI is showing “hot”?
- This argues for statistical lags
- March PPI is released Thursday and likely better
- March Core PCE released 4/26 (2 fridays from now)
We view this as a dip buying opportunity. This has happened with each “hot” CPI print. We think this is the same. Today is max pain and then markets recover.
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