Weekly Wisdom – April 14, 2023

By Hightower Great Lakes on April 14, 2023

Excluding Food, Energy and Shelter

Headline CPI inflation data came in lighter than expected, expanding just +0.10% m/m in March, compared to an expected +0.40% m/m. Headline CPI also retreated sharply year-over-year, +5% y/y, compared to February +6% y/y and peak-June +8.9% y/y.

Chart 1: Headline CPI Trending Downward Steadily Since June¹

Looking past the headline, which is clearly trending favorably for the Fed and supporting consumer wallets with reduced cost pressures, sub-categories of inflation continue to highlight sticky pricing power.

Core CPI, which excludes food and energy, increased +0.40% m/m in March and remains +5.6% y/y. While energy costs continue to drive headline CPI lower and represents 7% of CPI wallet share, rent of shelter, which represents 34% of wallet share, increased +0.6% m/m in March (or +7.3% annualized).

The Fed has cited CPI excluding food, energy and shelter as a measure to watch. This special aggregate increased +0.3% m/m in March, its fastest monthly pace since September. It remains +3.8% y/y. The Fed prefers this sub-category because it excludes the more volatile components of food and energy. The shelter category inflation is driven by systemic residential undersupply, of which the Fed has limited control.

Chart 2: Service Sectors Driving Elevated Inflation Sub-Categories²

When we look at the headline, CPI is clearly trending in the right direction, but under the surface, prices remain sticky in many categories – particularly service sectors. Service sectors are 75% of consumer spending.

Services CPI is +7.1% y/y, near its peak, which was just this past February. While many goods-related and commodity-related categories fall sharply, service categories are near all-time high annual inflation levels. Categories with elevated, sticky inflation include shelter, transportation, motor vehicles, health care, recreation and education.

Jobs Elevated, Driven by Same, Sticky Service Sectors

The biggest positive surprise this year has been the strong, sustainable job market. Initial claims remain low, nonfarm payrolls climb each month, and job openings substantial. The labor market remains tights, with low unemployment. This, similar to lower headline inflation, appears good for the consumer.

When we look under the surface, however, sticky components are driving this strong labor market across a concentrated number of sectors. Job availability and hiring are strongest within the service sectors.

Goods-producing sectors are contracting, driven by a slowdown across nonresidential construction and manufacturing industries. Despite this bifurcation across goods and service sectors, notable by both jobs and inflation data, the positive news is that services are 70% of GDP.

Chart 3: Service Sector Hiring Remains Elevated, Driving Nonfarm Payrolls³

Despite the elevated hiring, the number of leisure and hospitality employees remains below its pre-pandemic peak. The same is true for education and health services industries.

We root for positive jobs data because it supports the consumer and indicates a growing economy. Given the Fed’s dual mandate for maximum employment and price stability, we welcome moderation in both categories as the Fed continues to focus on fighting inflation.

Earnings Season Ahead

This Friday, we begin Q1 earnings season with multiple banks reporting. We will turn our focus towards company earnings for the next few weeks. Forecasts anticipate S&P 500 earnings to rise just 0.5% in 2023. Currently, earnings are in contraction on a year-over-year basis. While Q1 economic growth was healthy, we are paying close attention to forward guidance.

Chart 4: Annual Earnings Contraction⁴

Click here to read last week’s Weekly Wisdom (4/6).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

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This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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¹ Source: FactSet (chart). As of April 12, 2023.

² Source: FactSet (chart). As of April 12, 2023.

³ Source: FactSet (chart). As of April 12, 2023.

⁴ Source: FactSet (chart). As of April 12, 2023.