Inflation's old ceiling is starting to look like a floor

Added: 2026-05-12

[00:00:00]Look at that. What's going on there?

[00:00:05]>> Welcome to Yahoo Finance special coverage of Oh, hello. I didn't see you.

[00:00:10]I'll check my computer. I'm Julie and that's Milesland.

[00:00:14]We are awaiting the CPI numbers in just a few moments here. We were just talking about futures and how NASDAQ futures are down quite a bit.

[00:00:22]>> NASA futures are down. That's all I have for you on not quite sure what's going on there or just continued concern about, you know, kind of the run that we've had and whether it's justified and how long it can go. Um, and you know, the one thing as we talked about yesterday that we should note about this morning's consumer um inflation numbers is they're going to be weird.

[00:00:42]>> They are. They are. I mean, I I guess you know, you sort of look at a riskoff environment here, especially with the NASDAQ down significantly more than the S&P and the Dow. Uh, and I think these are always interesting economic data points where, you know, it's going to be weird. So, the two things specifically to look out for. We're going to see a very strange shelter number because of how the October and November shelter inflation, I guess you would say, wasn't calculated because they assumed no inflation, right? So, >> yeah, because the government was shut down.

[00:01:08]>> The government was shut down for 43 days there. Um, and also likely to see a rise in the cost of airline tickets as a result of a surge in jet fuel. So, we talk a lot about the core inflation numbers. Energy comes out of that, food comes out of that, but the pass through from higher jet fuel prices into airline tickets, right, airfares, uh does not come out of the core uh reading there.

[00:01:29]So core likely to be a little bit warmer uh than we saw last month. And I think something that ahead of the report it seemed like more folks wanted to say, well, maybe we'll look through get a cleaner number going forward, but as we discussed a little bit yesterday, I think it's it's a very messy inflation picture broadly, and I think today's report is only going to make that even more challenging as we get the change of control at the Fed at the end of the week.

[00:01:52]>> Yes, it looks like Kevin Worsh is poised on track towards be confirmed as next chair of the Federal Reserve. So, we should be getting these numbers now.

[00:02:00]0.6% 6% is the month-over-month increase in the consumer price index. Um the core number is up 4/10en of 1% which is a tenth of a percent hotter than estimated. And year-over-year up 3.8% headline that is also hotter and a significant uptick from the 3.3% um in March. And finally, core CPI year-over-year up 2.8%. So again, just running through these numbers, uh CPI, consumer inflation month over month rising 610 of 1%. you back out food and energy, you get an increase of 0.4%.

[00:02:34]Year-over-year, a tick up of 3.8% um or on a core basis up 2.8%. So indeed seeing some heat in these numbers. Of course, we'll you know, as we always do, we go into the release. We try to see where exactly all of this was showing up to get an idea of whether how much we can look.

[00:02:54]>> Yeah, let's just do some of those categories super quick before we get to our panel. Energy costs up 3.8% 8% in the month of April. So that's compared just to the prior month when we saw a 10.9% increase in the energy index uh in March. So a 17.9% annual increase in April uh in the energy index. Energy commodities. So there's your oil prices up 29.2%. Uh energy look at fuel oil up 54.3% as we were just discussing the byproduct breakdown within energy. And there is further detail further down in the report that we'll get to later on um in the programming today. But again, fuel oil up 54.3% year-over-year, up 5.8% in April. All three components of the energy index of energy commodities, gasoline, fuel oil, each up more than 5% month-on-month in April.

[00:03:42]>> Yeah. And and shelter, which we were just talking about, uh rising 610 of 1% on a month-over-month basis. That is a doubling of the gain that we saw the prior month. And so that there is that sort of wonky distortion number that we got. But looking at some of the other things, apparel up 610 of 1% and I was reading a number of economist commentaries going into this. The saying that we would start to see a sort of tariff rolloff effect, lapping effect if you will. Um so we'll dig more into the numbers and see what all that looks like.

[00:04:11]>> We will.

[00:04:11]>> All right. Should we bring in the panel?

[00:04:12]Joining us to break down the CPI reporters, Joe Bruceuelis, RSM chief economist, Steve Sausnik, Interactive Brokers chief strategist, and George Borie, Allspring Global Investments chief investment strategist for fixed income. Guys, thanks so much for being here. Um, Joe, I want to start with you here. Um, you, you know, among many economists, you flagged that we would see this distortion here. So, now that we've got it, like what can we read from the numbers X distortion? Okay, the most important reading actually is in the CPI. It's the real average earnings which are down 3ten of a percent year-over-year. What that means is negative wages have set in amongst the American public. Now, why is this important? Well, you know, most of the wage gains are clustered up market, right? Those are the people who are buying and investing in securities. So, the equities market will continue to be decoupled from the real economy. But when you talk talking about the middle class, working-class, working poor, they're actually going to be feeling the brunt of this. What this means is is that their living w living living standards are in decline at this point.

[00:05:17]Now, is this a threshold where we're going to see this continue or is it just a mild one to three month downward turn wage gains? Right now, my sense is is that I expect we're going to peak at or near or even above 4.5% in CPI. So assuming nominal wage gains are around three and a half, that means most of the public will be down 1% on wages probably within the next, you know, 90 to 120 days.

[00:05:45]>> To me, this is what the public and the political authorities going to be focusing on. Not necessarily government quirks that cause the coordinate to go up, right? But look, energy, transportation, right? Those things matter. And what I want to do is I want to really dig deep later on and see if those increase in transportation costs are bleeding into the grocery basket.

[00:06:09]>> Yep. And uh as you noted there, Joe, 174 days till the midterms. So uh that time frame certainly notable. Uh George, I want to bring you into the conversation here. We were talking a little bit um in the runup here about how this was going to be uh a challenging inflation report just given some of the noise in particular categories. I'm just curious now that you've had a chance to look at the numbers, what stands out to you and as you try to get a handle on just let's say the overall arc of inflation in this environment, what are your just key takeaways from the report this morning?

[00:06:38]>> Yeah, thanks. Uh well, you know, the key takeaways are are really that you know kind of obviously inflation's being driven by higher energy costs. Um as we've mentioned already on the show, there's there's a variety of one-offs.

[00:06:50]there is an upward trajectory in inflation that hasn't shown signs of turning yet. That is the key message.

[00:06:57]The componentry, you know, there's a variety of statistical quirks, but the underlying trend is for higher inflation and and as we just heard, you know, that does kind of erode people's purchasing power when they're consuming a wide range of of different items. Um, energy is is by far the the the biggest component which we know gets gets stripped out. But within core, you know, there are also, you know, kind of other other drivers of of of broad um consumables, especially in in shelter.

[00:07:27]Um, you know, shelter housing costs are still fairly elevated and that's a big part of what people consume.

[00:07:33]>> Um, and and Steve, let's get to you. All of this, I mean, I don't know if the markets will care about it today, but in general, the markets have not cared about any of this.

[00:07:44]That's kind of it, Julie. It's like almost, you know, market nihilism.

[00:07:48]Nothing seems to matter to markets as long as as long as they can continue to uh pump momentum into AI affected names, as long as the hyperscalers are spending. Uh that seems to be the market's uh mentality. I mean, we we these numbers by no means were good, but yet the futures equity futures really haven't moved uh as a result of them, which is telling you stocks are looking elsewhere. They're looking at I mean today the approximate cause for the downturn is is threats of a tax hike in in Korean semiconductor stocks but yet that's enough to get the fragile momentum going. As I look at, you know, indicators that the market might actually want to pay attention to besides uh Joe's point about real uh real wages, real earnings being lousy.

[00:08:33]That's and that's a huge problem. That that was that was my takeaway as well.

[00:08:37]We also have the 5-year, you know, I'm sorry, the 10, the 30-year note flirting with 5% right now. It had ticked above it for a second. It's a little bit below it now. And you've got the 2-year yield creeping up on 4%. Neither of those should be good for stocks. But then again, neither should uh hundred and some odd dollar crude oil. Neither should uh the lack of rate cuts. It's it's about it's about momentum. But as long as that uh that disconnect that Joe referred to uh can continue uh stocks can sort of exist in their own little world.

[00:09:06]>> Well, you know, two points in there, Joe, that Steve brought up, which is um both rates, which I I think we're kind of sleeping through 10 years, just hanging out around 4.4% would have been a problem not too long ago, but I did want to get your view on rate cuts over the balance of this year. Does this report change that? And just what your view is on the state of that conversation, which seems to be only Kevin Worsh is talking about it now, give or take. We're not getting rate cuts this year, guys. You know what I saw here in that little break? Services were up 610 of a percent. That's not a statistical anomaly. That's been building for quite some time. They're up 3.4% on a year ago basis. And what I the question I had posed earlier, it's showing up in food. Food jumped half a percent on the month is up 3.2%. And we're just scratching the surface on that. So, if you're a forward-looking central banker >> in good conscience, you're not going to be arguing for a rate cut. What you're going to be doing is talking about changing the the risk bias inside the statement, setting up two-sided risk so you build a bridge in case you do have to hike rates if this war moves on a lot longer and this inflation gets sticky and it's persistent. You know on that point I know central bankers love to talk about core inflation and that's a number we look at but it like let's take let's play out a scenario where you have headline inflation is four plus percent but core not going to happen but we're looking better right and you could say oh well core is trending towards our target but headline inflation we look past it. It seemed to me as I replayed 22 and 23, there's just like when you get into these moments, it is headline.

[00:10:37]Headline inflation is what you end up looking at. No matter how you want to explain it away as a central banker, to your point, you can't say, "Well, your real wages are down 1.2%." But my core metric is looking a little bit better, so I'm going to go ahead and >> It's a good way to lose your credibility, right? Steven Mirren's about to exit. The central bank probably worse than when he arrived because of exactly that. Kevin Worsh is not going to blow his credibility. He knows the Fed looks at all sorts of core metrics and besides look, this core number was not good. Yeah.

[00:11:06]>> And we can say, yeah, it had be it had to do with that government shutdown and we'll see a little bit of correction here over the next month or two. But the the one they're looking at is PCE topline. That's going higher. That's going in the wrong way. And the real problem is core PCE where that that service issue that I just mentioned. Oh no, that's going to show up big time when we get that in a couple weeks. So, I don't expect the drum beat of let's just say we really need rate cuts so equities can go higher to be repeated because let's be honest, the equity market's just decoupled from all of this, right?

[00:11:40]>> And this is about loans liquid loans and liquidity that people can use to leverage up to to purchase uh AI related equities. Um, George, coming back to you here. You know, if we're not getting any cuts this year, as we've been talking about, you know, is 5% the ceiling for the 30-year or do you see, you know, where do you see it going? Does it go above that?

[00:12:02]>> Yeah, I mean, bond yields are, you know, I think a key takeaway here is that this higher for longer narrative in the world of bonds is going to stick with us for for some time. And you know, we we seem to be trying to test and and establish a new trading range. As we just mentioned before, with the two-year close to say 4% and the 30-year right around five, it's hard to say we're at the absolute highs. We we simply don't know if if inflation is going to continue to push higher, and some people are talking about headline inflation getting close to four and a half, 5% over the next few months. Well, then the 30-year probably goes up. You know, the 30-year really is the is the relief valve in in the market. And so, you know, this is a a pretty good time for for bond investors because yields are are fairly attractive. Um, you can absorb a lot of volatility at these higher yields as an investor, but for borrowers, borrowers should prepare for higher borrowing costs and and that is likely to persist, you know, for the foreseeable future until the inflation story is is clear and until, you know, the Fed has really established their credibility. um these numbers are not Fedfriendly from a rate cutting standpoint and it and it likely underscores this notion that that interest rates are going to remain persistently high. Uh Steve, I know we just got the inflation numbers, but since I have you here, I'd love to sneak one in on semiconductor stocks and what your view is on the action we've seen in memory. And I think specifically, you know, I looked at Jared Blickery pulled some numbers yesterday on, you know, the flows into the new DRAM ETF outpacing what we saw into IBIT when Bitcoin, etc., etc. Like the retail bid, the enthusiasm in this market, um decoupling, I think, is the right word to use right now. I'm just curious what your perspective is on what we've seen in equity markets really just in the last 3 weeks. Multiple large established companies, their stocks have doubled.

[00:13:55]>> Yeah, Miles, this is this is borderline mania if not actual full-fledged mania.

[00:14:01]It you know it think about this socks index, Philadelphia semiconductor index, it's up about 70% in five to five or six weeks. Just mull that over for a second.

[00:14:12]Yes, a lot of that was based on better than better than expected earnings from some of these companies, many of these companies, and better guidance, although some of that guidance really only extends a quarter or so. Uh, but were we that mispriced, you know, 6 weeks ago?

[00:14:26]Are we that mispriced now? I'll argue at least some of each. Uh, but but when you have a move like this, this is be, you know, I look at our volume numbers. I I I'll give you a little scoop. I happen to look at our our trading data from yesterday. For the first time I can remember, Micron was in first place.

[00:14:42]It's almost always Nvidia and almost always te some combination of Nvidia, Tesla. Tesla's down, you know, somewhere fourth or fifth most active because everybody's trading semis, at least at our shop. And and I don't think we're unique in this. Um, you know, when I look around and see something like Qualcomm, which sort of been the forgotten semi all of a sudden, you know, shoot up 60%, not for any particular news, but maybe because it was sort of the one that was left behind. Uh this is this is almost this is manic and I understand why people are making comparisons uh to 1999 2000 because quite frankly this is the only precedent that people can find for some of this stuff. Um and and we're seeing rampant speculation in in call options which is telling us that this is a full-fledged frenzy. We're also seeing uh bids on upside calls. I don't want to get too wonky in terms of the the option math, but bottom line is uh people always were wanted to pay a little extra for downside puts for insurance purposes. I think right now people now are paying increased increased volatilities for upside calls, partially for speculation, partly for what I call FOMO insurance from from institutions.

[00:15:50]Maybe if you're an institution who says, you know what, I I I don't want to be buying semis up 60% 70%. But I I I can't miss this because otherwise I'll get fired or get no bonus. They're they're buying they're buying call options to hedge themselves to at least keep their exposure without spending a lot of money or or moving their portfolio in a big way. This is this is as manic as I can remember any sector being.

[00:16:13]>> On that note, we got to leave it there, guys.

[00:16:16]>> Inflation was hotter than expected, though.

[00:16:18]>> Inflation was hotter. Everything's great. Um, Steve, we'll have we'll have you back soon and we'll continue that conversation. Joe George, we will talk to you soon as well. Thanks, guys. All of you. Really appreciate it.

[00:16:29]>> And stay tuned. Uh, we'll be back. We'll be talking more about all of that's Morning Brief at 9:00 a.m. Eastern.

[00:16:36]We'll have more coverage on today's top headlines.