CPI Prints Cool Which Validates Our Bullish Outlook

CPI printed cool at .2% vs. expectations of .3% with Y/Y CPI declining to 2.4%.  Core CPI was in line at .3% and 2.5%.  The critical shelter component resumed its delayed decline coming in a .2 after a one month blip up to .4 from .1 the prior two months.  Declines in shelter are likely to persist throughout the year unlike other more volatile components. Shelter is the fatal flaw of CPI in it is de facto delayed by 2 years, The decline of shelter should continue which validates our forecast that PCE core rolls down to 2.0% by the end of 2026 with a large portion of that decline occurring in the first quarter of 2026 after we roll off high prints in 2025.  Volatile components of CPI were up airline fares up 6.5%, recreation up .5% and education up .4% offset somewhat by a 1.8% decline in used cars.

Real-time measurement of shelter using modern data sources from national internet data bases shows that Realflation published at www.infracapfunds.com is at 1.2% year-over-year on CPI core and 2% on PCE core. Other alternative measures of inflation such as Trueflation which is at less than .9% year over year also validate our view that inflation is already tamed and that 3 Fed rate cuts are appropriate this year.  These measures combined with our forecast for published PCE core, validates our forecast of 3 rate cuts resulting in a target for the 10-year of 3.75%.  After the print, there were 60bp of cuts priced in and the 10-year yield declined to 4.08 as the terminal Fed Funds rate declined to 3.03 and stock futures turned positive.  Declining rates will support our bullish 8,000 target on the S&P 500 Index.