2% inflation target out of reach until services ease: Strategist

As April’s Consumer Price Index (CPI) showed signs of inflation moderating, the S&P 500 (^GSPC) and NASDAQ Composite (^ICIX) reached record highs. Rabobank Senior Cross-Asset Macro Strategist Christian Lawrence joins Catalysts to discuss the latest CPI print and what it could signal for the current inflationary moment.

Following today’s record highs, Lawrence says, “The sensitivity to data releases is going to continue.” However, he does warn of pressures like shelter inflation that will continue to challenge households nationwide.

He adds, “In order to see a real slowdown in inflation particularly, it’s the services measure that we really need to focus on…Without that easing, without seeing consumption start to slow, we’re not going to get that 2% target.” He believes that the inflation won’t return to 2% in the next few years as domestic production and trade barriers remain key factors in the economy.

“When it comes to shelter inflation, I don’t see much relief in the coming months whatsoever. And that’s going to keep that core services measure higher,” Lawrence explains. He says the housing market is deadlocked as homeowners are largely unwilling to sell amid high mortgage rates. In addition, he says that rental inflation will not fall back to pre-pandemic levels.

As all eyes are on the Federal Reserve’s next interest rate decision, Lawrence breaks down the likelihood of cuts and the long-term health of the economy.

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Melanie Riehl

Video Transcript

Even with some progress shown today on consumer prices, our next guest says we may not get down to 2% inflation even in the next few years.

So what impact could that have moving forward joining us Now we’ve got Christian Lawrence Rob a bank senior cross asset macro strategist Christian.

Thanks for coming in person.

We appreciate it.

So markets very happy about the CP I print is a little bit too much happiness for see.

I think so.

And the reaction is somewhat complex by the retail sales print because that came in much weaker than expected.

So I think that that was actually the main driver of the move lower in yields and that move lower in yields, certainly welcomed by the equity market and explains that all time high in the S and P 500.

Do you think this move that we’re seeing today is just a blip?

How do you expect to see this play out here over the trading session?

And then, of course, as investors have a little bit more time to digest the reports that we got out this morning, the sensitivity to data is going to continue and we will see these very large reactions.

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We see it pan out in the rates world where moves of 10 basis points in a day.

We saw that yesterday as well.

These will become and will remain very common features, and I think we’re seeing a little bit more sensitivity also to the activity data than previously.

We know the inflation numbers.

Yes, they’re down from the absolute peak, but I still think we’re going to see some sticky pressures.

Look at that shelter.

Inflation there.

That’s a real key point.

And of course, shelter is one of the main expenses for households.

Well, I just want to go back to what you said about retail being the catalyst for this upside movement that we’re seeing today because, as you mentioned, consumers are spending a lot on things that are not measured by the retail sales print.

So why should we be putting so much weight on that data point?

I think, in order to see real slowdown in inflation, particularly, it’s the services measure that we really need to focus on, and that’s still printing at that 0.4% rate that it has done for quite some time.

and without that easing, without seeing consumption start to slow, we’re not going to get that 2% target.

And I think there are other reasons why that 2% is going to be hard to achieve.

More structural global factors, particularly related to more in the way of domestic production and more in the way of trade barriers going forward.

As we’ve seen already, there seems to be a lot of questions just about how much stock we should put in the CP I for interest in terms of what this is really telling us about the deflationary story, if anything at all.

How are you viewing or what are your expectations in terms of inflation and maybe any sort of improvement that we could see in the coming months?

It’s so important to dig below the surface right?

And when it comes to shelter inflation, I don’t see much relief in the coming months whatsoever, and that’s going to keep that core services measure high.

And actually, when it comes to goods, we had core goods deflation.

I actually think in the next couple of months some of the shipping costs we saw earlier this year that’s going to start filtering through, and we could actually get a little bit more upward pressure on that good side of things as well.

What’s it going to take to see more improvement?

Stabilisation within the rental part within the services part of this?

Well, I think that’s going to be very difficult indeed.

The structure of the housing market essentially means this is deadlock because nobody wants to sell at the moment.

And you know, most people that have a mortgage are fixed at very low rates, and we have one of the highest proportions of people not even having a mortgage at the moment and owning their house outright.

So I think this is a real structural factor.

That means to be blunt.

Rental inflation is not going back to the levels.

It was pre covid.

So are high rates inflationary?

Well, that’s that’s a very controversial topic.

I think at this moment, with the way the economy is right now, there’s a strong argument to be made for that.

So what does that tell us about what you think the Fed?

What would make the most sense in terms of the Fed’s path forward?

The timeline of rate cuts and exactly what we should expect to play out then, given the fact that it almost seems like by the week the narrative is changing surrounding the Fed.

Not too long ago, we were talking about Hey, maybe we could potentially see another hike now that now the sentiment And now the conversation has really turned to the likelihood of cuts, which I think makes the most sense.

But what are you expecting to see in that playbook?

Well, I mean, when you look at the Fed’s dot plot and you see at the end of next year, one member has right to double another member, it shows you that level of uncertainty out there so way.

Way back in September 2022 our view was three rate cuts starting in the middle of 2024 and we’ve only just changed that to two rate cuts.

I think the risk to that is, actually, they don’t go twice.

But what I will say is that for next year we only have two more 25 basis point rate cuts pencilled in, and we have nothing for 2026.

Based on the idea that we are going to see a lot more in the way of tariffs.

Actually, inflation is going to be perhaps heading a little bit higher.

How much of the tariffs piece plays into your thesis there?

Yes, that’s a huge part.

But as we’ve just seen, that is now a bipartisan issue.

So we will see more tariffs.

We will see.

Essentially, it’s not de globalisation, but it’s a change in globalisation.

It’s a re globalisation, and that’s structurally inflationary.

Does that pose a risk to the economy?

Uh, yes.

Certainly.

It also poses a long term positive.

Um, we could see a lot more in the way of manufacturing investment we already have.

I think that that’s going to continue.

And it could set up for a healthy economy further down the line.

But we know in the short term, tariffs can be quite painful, and they’re almost certainly inflationary.

All Christian Lawrence.

Great to have you.

And thanks so much for coming in on set and joining us here.

Robert, be senior processor Mass Macro.

Strategist.

Thanks for having me