By: Aaron Wall, CFA
Partner, Portfolio Manager
Happy Friday everyone! Markets have continued to rally this week, with stellar Q1 earnings providing some relief from concerns around ongoing geopolitical conflicts.
With 89% of companies reporting as of May 8, FactSet is calculating a remarkable 27.7% blended growth rate for the quarter. This would be the highest growth rate reported since Q4 of 2021. As mentioned in greater detail last week, these impressive growth numbers help justify the market’s recent moves higher.
This week, we’ll focus on the latest Consumer Price Index report and the confirmation of Kevin Warsh as Fed Chairman.
April CPI Surprises, But Are We Surprised?
The April CPI report came in at 3.8% year-over-year, slightly higher than the expected 3.7%. While this was an upside surprise, there were a few widely anticipated numbers in the data.Gas and oil have seen significant spikes since the Iran war began. Gas climbed 21.2% and oil jumped 30.7% in March before slowing down in April, when gas rose by 5.4% and oil by 5.8%.
These CPI components are volatile but have so far behaved as expected amid higher energy prices. Higher energy prices directly affect CPI, with motor fuel making up 2.981% of the overall CPI basket.
(This is a key takeaway from the March 27 edition of Investment Insights, where we analyzed how oil impacts inflation. Read this commentary for a deeper dive on the connection between oil and inflation.)
It’s also important to understand that the Fed is primarily concerned with “sticky” inflation components—which tend to signal a broader trend towards higher inflation instead of a brief spike—when making policy decisions. The Atlanta Fed measures these components with its Sticky-Price CPI, reported on the same day as the Bureau of Labor Statistics’ CPI release.
Source: The Federal Reserve Bank of Atlanta
Unsurprisingly, the largest weight in the Sticky-Price CPI is shelter, which has increased between 0.2% to 0.4% in the broader BLS data over the last six months.
Something that was a surprise? Shelter costs increasing by 0.6% in April—potentially complicating the Fed’s ability to resume cutting interest rates. This is not enough to establish a trend, but it does confirm why we see a modest uptick in the Sticky-Price CPI.
We’ll continue to watch shelter costs and the Atlanta Fed’s Sticky-Price CPI closely over the next few inflation reports seeing as either of these moving higher is not a welcome sign in the fight against inflation.
Kevin Warsh Confirmed As Next Fed Chair
On Wednesday, the Senate confirmed Kevin Warsh as the 17th Chairman of the Federal Reserve in an essentially party-line vote.Warsh previously served as a Federal Reserve Governor. When appointed at age 35 in 2006, he became the youngest governor in Fed history.
Warsh will have his hands full as Fed Chair. He will need to work toward reaching a consensus among the Fed’s voting bloc, which will include Jerome Powell, who has opted to stay on the Board for the foreseeable future. This is not typical of former Fed chairs, but it is seen as a reactionary move following increased pressure from the Trump administration.
Warsh will also need to find consensus around how the Fed should navigate current economic conditions. The Fed has missed its 2% inflation target for some time now, and recent inflation figures are moving in the wrong direction thanks to the aforementioned spike in energy prices. At the same time, earnings remain strong and the economy remains near full employment.
