The CPI report today was admittedly softer than our initial hawkish forecasts, with headline coming in unchanged at 0.0% MoM vs 0.1% expected while core came in to the soft side of 0.2% MoM vs 0.3% expected. Our anticipation of rising goods-flation didn’t play out fully, and while shelter re-accelerated as we forecasted, core services disinflated heavily in May due to auto insurance costs declining. 

The main culprit behind the dovish CPI report was the sudden drop in Motor Vehicle Insurance (chart 2.b), which has so far been printing at trend MoM levels around 1-1.5%, lifting headline inflation by 0.03-0.05% consecutively. We are currently diving into the reason behind both the rapid inflation (and deflation) in the category, but are still puzzled as to how the component suddenly made a U-turn, as US auto data doesn’t align with the deflation seen. When analyzing the production-inventory-sales cycle in cars to predict auto insurance trends, we observe potential for disinflation in 2024. However, the overall trends remain concerning. While there are signs of disinflation in this sector, negative month-over-month (MoM) prints are likely just 100% noise based on our findings.

Our long-lead forecast shows a year-over-year (YoY) inflation trough at 10%, which translates to nearly 1% per month in this category. This is NOT a new normal.

Chart 1: Our long-lead on inflation in auto insurance costs sees disinflation but still at alarming levels