Morgan Stanley's Gapen Expects Inflation to Peak in May or June

Summary

Morgan Stanley's chief US economist Gapen analyzes the latest CPI report, citing second-round effects from energy prices on core inflation, tariff pass-through, and a catch-up effect in shelter costs. He expects inflation to peak in May or June and believes the Federal Reserve will remain on the sidelines for the rest of the year.

• CPI rose 3.8% year-over-year, core up 0.4% monthly.
• Higher energy prices are spilling into core inflation through airline and food costs.
• Tariff pass-through is still affecting core goods like apparel.
• Shelter costs were artificially boosted by a government shutdown catch-up.
• Gapen sees inflation peaking in May or June on a year-over-year basis.
• Fed is expected to look through current inflation but with a long lag.
• Companies are able to pass on price increases, reflecting strong pricing power and oligopolistic market structure.
• The Fed is likely on hold for the remainder of 2024.