This is largely due to the dramatic decline in gasoline prices from last year's highs after Russia launched its invasion of Ukraine. It's the "core" rate, which strips out energy and food, that has a bigger influence on the Federal Reserve though and those numbers aren't coming down nearly as fast.
Core inflation has been held up by ongoing price pressures across a wide range of goods but the primary driver has been the services sector, which includes "shelter" and "transportation services." Shelter covers rent and owner-equivalent rents while transportation services includes things like airfares and motor vehicle insurance. In April, inflation in the latter category was one of the biggest contributors at +11% year-over-year and is not likely to see relief anytime soon thanks to a booming summer travel season and airfares to match, not to mention another year of climbing insurance premiums.
Shelter costs have shown some retreat but the most meaningful declines have been regional and the component remains the largest contributor to headline inflation, followed by used cars and trucks. Shelter costs also filter through the data with a 6 to 12 month lag and it was only last month that national rents logged their first decline since the start of the Covid pandemic. Notably, that decline was only a meager -0.4%.
Bottom line, the Fed's preferred "core" inflation rate could remain stubbornly high even as headline inflation plunges closer to the central bank's +2% target. How, if at all, the Fed might respond to this growing gap is not clear. Earlier in the inflation cycle, Fed Chair Jerome Powell said they were more strongly influenced by the headline rate as gasoline and food prices account for such a sizable portion of consumer budgets.
The Fed has also repeatedly said that it wants to see evidence that inflation is trending down before ending its tightening campaign, not that it has to be at 2%.
However, if CPI shows inflation trending back up, it may be tough for central bank officials to justify a widely expected pause in its rate hike campaign. The Fed's two-day policy meeting begins today with the decision due tomorrow at 1 p.m. CST, followed by a press conference with Powell. The only other data due out today is the Small Business Optimism Index and there is nothing of note on the earnings calendar.
AI's High Growth Will Be No Match for iPhone: Generative AI will experience explosive growth in coming years, but the cash the core technology generates for its inventors will pale in comparison to revenue from Big Tech's existing services and hardware, per a new S&P Global report.Though Generative AI is blowing our minds and changing our jobs right now, the companies driving that innovation will struggle to join the household name ranks of Apple, Google and Microsoft.
Keep in mind, AI providers will often be operating in less lucrative B2B markets, while consumer-facing companies rack up savings from using AI, and find ways to sell more profitable AI-powered services.Five years after smartphones hit the market, their global market revenue was around $330 billion, nearly 10 times what's forecast for generative AI. Apple's iPhone alone brought in $78.7 billion in revenue in 2012, five years after launch more than double the total predicted market for all generative AI five years from now.While it's extremely rare for a start-up to hit $1 billion in revenue in its first five years, any generative AI startup that could capture 15% of the predicted market would achieve that feat. S&P Global predicts that foundation models will remain the largest source of income for generative AI providers, ahead of text generators. Source Axios
Costco’s Billion-Dollar Bet On $4.99 Rotisserie Chickens: Costco’s aromatic $4.99 roasted-in-house rotisserie chickens are mouth-watering magnets to shoppers at its 600 U.S. warehouse stores. That’s why the membership-based retailer has spent an estimated $1 billion to construct this state-of-the-art plant, which ships 1 million chickens a week, and build out its own network of chicken farmers. That bill, paid over the past eight years, has helped Costco become the only retailer to own a chicken slaughterhouse. The publicly traded company is trying to shore up its own supply of rotisserie hens at a time when chicken prices have tanked, most of the industry’s processors are reeling from price-fixing settlements and an unprecedented outbreak of avian flu has killed nearly 59 million birds nationwide. Source Forbes
Crypto Trading Volume Dropping Sharply: Popular trading platform Robinhood (HOOD) has seen a steep decline in crypto trading volume in May, the company reported on Monday, even while volume for equities and options remained high. The company reported that trading volume for cryptocurrencies dropped to $2.1 billion in May, down 43% from the prior month. On a yearly basis, crypto trading volume slowed 68%. Source Coindesk
In a First, Wind and Solar Generated More Power Than Coal in U.S.: Wind and solar generated more electricity than coal through May, an E&E News review of federal data shows, marking the first time renewables have outpaced the former king of American power over a five-month period. The milestone illustrates the ongoing transformation of the U.S. power sector. Power markets have witnessed a precipitous drop in coal-fired generation this year, driven by low natural gas prices, a mild winter and a wave of coal plant retirements. “From a coal perspective, it has been a disaster,” said Andy Blumenfeld, an analyst who tracks the industry at McCloskey by OPIS. “The decline is happening faster than anyone anticipated.” Renewable energy generation exceeded coal-fired power in 2020 and 2022, but only when hydropower was counted as a source of renewable energy, according to figures compiled by the U.S. Energy Information Administration. This year has been different. Wind and solar sources generated a combined 252 terawatt-hours through the first five months of 2023, compared with coal output of 249 TWh, EIA data shows. Hydro generated an additional 117 TWh through May. Coal generated almost half of the country’s electricity as recently as 2008. The U.S. has retired around 14 gigawatts of coal capacity, or roughly 7 percent of the coal fleet, since the start of 2022. Source Scientific American
I-95 Collapse in Philadelphia to Upend Shipping, Travel for Months: The collapse of a section of Interstate 95 in Philadelphia will cause “major disruption” in the region just as the summer travel season begins, US Transportation Secretary Pete Buttigieg said. A section of the highway, the longest north-south interstate on the East Coast, collapsed during a tanker-truck fire on Sunday. Northbound and southbound lanes will be closed for months, according to Pennsylvania Governor Josh Shapiro, who on Monday signed a disaster proclamation to free emergency funding. The 1,924-mile (3,096-kilometer) interstate runs from Miami to the Maine-Canada border. It’s part of a critical long-distance trucking and commuting route that cuts through Philadelphia. Beyond the city’s heart, the highway provides access to Philadelphia International Airport and the Philadelphia Port, with a foreign trade zone, an automobile terminal that can process 1,000 vehicles a day and a wholesale produce market that is the world’s largest enclosed refrigerated space of its kind, according to its operator. Source Bloomberg
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