The inflation numbers this morning were in-line with expectations.
With that, we had a decline in year-over-year inflation (i.e. a fall in the consumer price index).
And as we discussed yesterday, the hot spots continue to be auto insurance and shelter (which includes the influence of rising insurance prices).
Let's take a look at what the inflation number would look like without the effect of a 22.6% annual increase in motor vehicle insurance (the orange line).
Now, what would it look like if we stripped out auto insurance and owners equivalent rent?
Both auto insurance and owner's equivalent rent make up about 30% of the CPI. And both of these CPI components are lagging features of an asset price boom.
As you can see, excluding those two inputs we get a CPI that is more representative of the demand trend. And it's running well below 2%.
The Fed holding rates at historically tight levels does nothing to solve the influence of auto insurance premium and owner's equivalent rent on the headline inflation number. If anything the Fed's high rates are artificially boosting demand for rentals, because the (related) high mortgage rates are prohibitively expensive for potential home buyers.
So, unless the Fed is trying to induce an asset price bust (deflationary bust) and economic contraction, which would mean we get all of the debt from trillions of dollars of fiscal stimulus and none of the growth, then they should be cutting rates.
The market seems to be getting that message.