Week Ahead on Wall Street: Sticky Inflation

Driving Prices Higher: Housing and… Auto Insurance?

Who’s to blame for inflation? We can all see prices increasing on everything from housing to cars to groceries — and more. But not all goods and services are created equal when it comes to inflation. And though there may not be one person who’s responsible, there are certainly a few industries that are pushing prices higher faster than others.

The Federal Reserve has raised interest rates numerous times over the past few years to try to slow the economy and curb inflation. Despite inflation easing significantly since its recent peak in 2022, it has remained above the Fed’s 2% annual target. Earlier in the year, the Federal Reserve hinted that it might cut interest rates if inflation continued to cool, and moved closer to the Fed’s desired range. (Voiceover: Inflation did not continue to cool.). In fact, inflation has remained pretty hot — which has led to dwindling expectations for a rate cut and even murmurs about possible rate hikes. Yikes.

Consensus estimates are for the Consumer Price Index to have increased by 0.4% in April and 3.4% since this time last year — which, once again, would not satisfy the Fed’s inflation target (for the fourth month in a row). And the main culprits for this are housing and — surprise — motor vehicle insurance.

Rent, in particular, has often been a major inflation driver, accounting for nearly half of the year-over-year increases in CPI before the pandemic. But it’s an even bigger factor today, accounting for 57% of the recent increase. And motor vehicle Insurance, which accounted for just 1 to 3% of inflation pre-pandemic, is now responsible for more than 16% of total inflation since last year. That means that these two CPI components are responsible for driving nearly three quarters of the increase in prices over the last year.

Some investors believe economic components like housing and insurance have a tendency to lag — that is, to reflect past inflation trends — and may distort CPI as a result. That could overstate their influence on the underlying measurement of inflation trends. This week’s inflation data won’t put those concerns to bed one way or another, but they’re sure to be part of the conversation.

Economic and Earnings Calendar

Monday

•   April New York Fed Survey of Consumer Expectations: This is a measure of peoples’ expectations for inflation, jobs prospects, earnings growth, and more.

•   Fedspeak: Cleveland Fed President Loretta Mester and Fed Vice Chair Philip Jefferson will discuss central bank communications.

Tuesday

•   April NFIB Small Business Optimism: This measures how small business owners feel about current and future economic conditions.

•   April Producer Price Index: The PPI tracks price trends that producers face and is down significantly from its peak earlier in the cycle.

•   Fedspeak: Fed Governor Lisa Cook will talk about growth and change at a New York Fed event on community development financial institutions. Fed Chair Jerome Powell will speak alongside ECB Governing Council member Klaas Knot at an event organized by the Netherlands’ Foreign bankers’ Association.

•   Earnings: Home Depot (HD)

Wednesday

•   April Consumer Price Index: The CPI is one of the most popular indicators for tracking consumer price trends and is a marquee release for market watchers. CPI has come down notably from its peak in 2022 but remains somewhat above pre-pandemic levels.

•   May Empire State Manufacturing Activity: The New York Fed’s survey of manufacturing executives in the region on business conditions and their outlook.

•   April Retail Sales: This is a key indicator of consumer demand.

•   May NAHB Housing Market Index: This index tracks how homebuilders feel about the current and future state of the single-family housing market.

•   Weekly Mortgage Applications: Mortgage activity gives insight on demand conditions in the housing market.

•   Fedspeak: Minneapolis Fed President Neel Kashkari will participate in a fireside chat on the economy.

•   Earnings: Cisco (CSCO)

Thursday

•   April Building Permits and Housing Starts: Construction data is a leading indicator of business activity.

•   May New York Services Activity: The New York Fed’s survey of non-manufacturing executives in the region on business conditions and their outlook.

•   May Philadelphia Fed Manufacturing Activity: The Philadelphia Fed’s survey of manufacturing executives in the region on business conditions and their outlook.

•   April Industrial Production and Capacity Utilization: The industrial sector accounts for much of the cyclical swings in economic activity.

•   Weekly Jobless Claims: This high frequency labor market data gives insight into filings for unemployment benefits. Jobless claims have continued to show a labor market that remains strong despite having cooled.

•   Fedspeak: Philadelphia Fed President Patrick Harket will discuss the economic impact of higher education and healthcare institutions. Cleveland Fed President Loretta Mester will discuss the economic outlook. Atlanta Fed President Raphael Bostic will take part in a moderated conversation on the economic outlook.

•   Earnings: Applied Materials (AMAT), Copart (CPRT), Deere & Company (DE), Take-Two Interactive Software (TTWO), Walmart (WMT)

Friday

•   April Leading Economic Index: This is an index composed of various economic indicators that have historically led changes in the broader economy.

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