Cool CPI Validates Our Stag Deflation Call

CPI printed very light at .1% vs. consensus at .3%.  Importantly, the deeply lagged shelter component finally decelerated with rent declining to .2% from .3% and owners equivalent rent declining to .3% from .4%. This decline is critical as it is likely to continue in the future due to the lag in the estimate and the fact that market rent increases continue to be in the 1-2% range.  Transportation services also cooled with vehicle maintenance declining to -.1% from .7%.  Energy also continued to decline down 1%.

We reiterate our StagDeflation call as the critical determinants of inflation, money supply growth and energy prices, are both declining year over year.  In fact, the almost 15% decline in energy prices more than offsets any potential increase due to tariffs.  Importantly, declines in energy prices bleed through to core as all businesses use substantial energy.  We continue to project that the Fed will cut 2-3 times this year as the inflation data continues to print cool and the labor market decelerates as ultra-tight monetary policy takes a toll on the housing and construction market.   The CPI print implies a .2% PCE core print at month end, which is consistent with inflation declining below the Fed’s 2% target.  

We have a 3.75% target on the 10-year treasury as Fed rate cuts are likely to drive rates lower by year end.  Our year end price target on the S&P 500 Index is 6,600 based on 22x and our 2026 S&P earnings estimate of $300.