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WAITING FOR THE CHICKENS TO COME HOME TO ROOST: CPI, BARELY CHANGED, TARIFF EFFECT A NO-SHOW

The week's most hotly anticipated data in the form of CPI surprised to the downside on Wednesday; the expected tariff effect failed to appear.

The Labor Department's Consumer Price Index $(CPI.UK)$ USCPI=ECI, which tracks the prices U.S. consumers pay for a basket of goods and services, unexpectedly cooled down last month.

On a monthly basis, headline and core (ex. food, energy) prices both increased by a scant 0.1%. Both measures landed south of consensus and marked a deceleration from April.

Year-over-year, headline and core printed at 2.4% and 2.8%, respectively. The headline number added heat from the prior month's 2.3%, while the core measure repeated the March figure. But again, both came in just a hair below analyst expectations.

With core inflation within one percentage point of Powell & Co's 2% target, one might think the Fed is eyeing its next rate cut.

But President Trump's market-rattling tariff blitz, still a moving target as negotiations plod along, is still looming large, and have likely not affected inflation data as companies sell merchandise accumulated as trade related uncertainties sparked an inventory rush.

"The jury is still out on the economic effects from tariffs," writes Skylar Weinand, chief investment officer at Regan Capital, who adds that current economic data "must be taken in conjunction with the next few months to better understand the economic effects of tariffs, which take time to work their way through the economy."

Core CPI, incidentally, is the second major indicator to show annual inflation taking a pause on its meandering journey back down to that elusive 2%.

Line-by-line, a 1.0% drop in energy prices helped drive gasoline and air fares down 2.6% and 2.7%, respectively, while food, utilities and prescription drug price growth was hotter than the broader average.

The Fed continues to scrutinize two segments; the cost of shelter, which rose 0.3% and services, which notched a 0.2% increase. Year-over-year, shelter and services show respective growth of 3.9% and 3.7%, running well above the underlying measures.

Even so, they appear to be moving in an agreeable direction.

"Shelter and energy are going to keep the disinflation trend intact - prices are moving down in two of the largest categories, so investors should expect further declines in inflation in the coming months," opines Jamie Cox, managing partner for Harris Financial Group.

Separately, cost of financing home loans ticked a bit higher last week, according to the Mortgage Bankers Association (MBA).

Be that as it may, overall mortgage demand counterintuitively surged by 12.5%.

The average 30-year fixed contract rate USMG=ECI added exactly one basis point to land at 6.93%.

Even so potential buyers USMGPI=ECI increased by 10.3% and refi applications, which accounted for 36.7% of total mortgage activity, jumped by 15.6%.

“Coming out of the Memorial Day holiday, mortgage applications increased to the highest level in over a month, driven by growth in both purchase and refinance applications," writes Joel Kan, MBA’s deputy chief economist. "Despite ongoing uncertainty surrounding the economy, homebuyers seem to be taking advantage of loosening housing inventory in certain markets.”

The 30-year fixed rate, having taken a roller coaster ride over the last 12 months, is now just 9 basis points cooler than it was the same week a year ago.

Over that same time frame, purchase and refi demand have grown by 18.9% and 27.5%, respectively.

(Stephen Culp)

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