Claims and PPI Confirm Our StagDeflation Call

Unemployment claims, a critical leading indicator of the job market, increased with weekly claims up to 248k vs. expectations of 242k and continuing claims rising to 1,956k vs. expectations of 1,910k.  PPI also printed cool at .1% vs expectations of .3%. with core also coming in at .1% vs. expectations of .3.  The combination of the CPI and PPI releases implies that PCE core will come in .17% for May.  We forecast that PCE core will roll down to 2.1% by May of next year.

Both releases validate our StagDeflation call with the continuing claims data indicating a substantial slow down in the job market.  The Fed should absolutely cut rates at its June meeting but will not as it has no ability to forecast inflation as it uses flawed inflation forecasting models that incorporate the discredited “expectations” theory of inflation and the failed Phillips Curve theory.  The critical endogenous or independent variables that predict inflation are the money supply and energy prices.  Both of these indicators are down for the year and the lagged shelter component of CPI finally is starting to reflect the collapse in market rent growth.  Importantly, our real time PCE index that utilizes real time rents to estimate shelter is now at 2.0% Y/Y.  We do expect the Fed to cut 3 times this year as the labor market continues to weaken in the second half of the year and inflation continues to decline.