Inflation Salad with a Side of Employment Figures

Last week most economists had forecasted 200,000 jobs to be added. Instead, the Bureau of Labor Statistics exceeded expectations and announced that 303,000 jobs had been added in March.

This morning the Consumer Price Index (CPI-U) turned to those employment numbers and said “here, hold my beer, because no good story ever started with a salad.”

Inflation, as measured by the CPI-U was expected to increase 0.3% month-over-month (m-m) after increasing 0.4% m-m in February. Instead, we again saw a 0.4% increase that drove the year-over-year increase up from 3.2% in February to 3.5% in March, heading the wrong way in the Fed’s fight to curb inflation down to 2%. If you exclude food and energy, inflation was 3.8% y-y. This marks three straight months of inflation figures coming in hotter than expected.

Earlier this year the Fed had signaled that multiple interest rate cuts were likely since numbers were moving in the right direction. After the employment report and the inflation numbers, the probability of multiples cuts has dropped and the likelihood of them happening sooner than later is declining. Consensus has landed on two cuts (three were forecasted a few weeks ago) with the first occurring possibly in September (previously had been forecast for June).

What drove the m-m numbers up?

Gasoline was up 1.7% m-m which comes as no surprise given the current geopolitical situation in the Middle East.

Shelter costs remain high and are proving to be stickier than expected and are not as volatile as fuel costs.

Clothing and apparel costs grew by 0.7% m-m.

Was there any good news?

While I tend to be a bit “doom and gloom”, there were a few positives in this month’s inflation data.

Food at home was unchanged month-over-month. There were significant ups and downs, but in aggregate costs were flat.

If you are a salad lover, you may prefer to switch to a ham and cheese sandwich in the near term (Lettuce was up 5.9% m-m, Ham was down -2.6% m-m, Cheese was down -0.3% m-m, and Bread was down -0.9% m-m, but skip the condiments which were up 0.9% m-m and have that cookie for dessert that was down -1.0% m-m.)

New vehicles were down -0.2% m-m and Used Vehicles declined -1.1% m-m. It will cost you 2.6% more to get insurance for those vehicles and 1.7% more to put gas in the tank than it did last month.

Maybe we should switch topics…

What does this mean to construction costs?

The immediate reaction to the CPI-U release was a decline in lumber futures, dropping to a two-month low at the time of this writing. The growing pessimism towards an impending or multiple rate cuts lessens lumber demand on speculation. Domestic and Canadian positive housing start forecasts had been driving the ramp up in mill production which had been outpacing demand. Canadian output increased by 16.4% earlier this year on optimist outlooks.

As inflation stays elevated, so will labor costs. A year ago, the craft labor wage increase was 6.61% y-y. Currently it is 4.89% y-y. While it has declined, it did tick up from the February numbers (4.70% y-y).

It is also important to note that mortgage rates are likely to tick higher in the coming weeks and the federal budget deficit will eat into available borrowing. Developers and owners will continue to see tight lending practices from banks and will continue to struggle to obtain financing. This will keep the Project Stress Index elevated with projects being put on hold, delayed, or abandoned, particularly in the private sector.

Do we need to hit the 2% target to see the first rate cut?

No.

Think of how the Fed will be treating rate cuts like how Dr. Nowzaradan handles his patients on My 600 Lb. Life. Dr Nowzaradan expects his patients to consistently lose a certain amount of weight over a sustained period before he approves them for weight loss surgery.

Sometimes they hit the mark, sometimes they don’t but make “good-enough” progress. Rate cuts will come before we “hit the target”, but the market data needs to show it is serious about a reduction and the direction the data is trending is “good-enough.”

After having binge watched that show, maybe I’ll skip that cookie after all.