Inflation Views
Neutral Conditions Prevail
Welcome to Prometheus Asset Allocation. The Prometheus Asset Allocation program offers a stable, macro-focused approach to asset management. Prometheus Asset Allocation aims to outperform a traditional stock and bond portfolio by leveraging our proprietary systematic macro process to rotate between 3 ETFs monthly (plus cash). As part of the program, we will be sharing our views on Growth, Inflation, and Liquidity in addition to our monthly video updates.
Our primary takeaways are as follows:
The latest CPI data disappointed consensus expectations and drove a deceleration in the three-month inflation trend. This print was dominated by shelter and transportation.
The primary drag was the public transportation category, particularly airline fares. New vehicles inflation also came in lower, but used vehicle inflation continues to rise. Additionally, housing inflation continued to slow, consistent with the declining nominal activity in the sector.
Zooming out, nominal spending potential remains elevated due to low monetary policy pass-through effect. However, weak industrial production complemented with a modestly looser labor market reduces pressure on inflation.
In the context of markets, neutral inflationary pressures are a headwind for bonds. This is reflected in our Prometheus Asset Allocation Strategy.
In February, headline CPI came in at 0.22%, disappointing consensus expectations of 0.3%. Core CPI contributed 0.18% to this print, with food & energy contributing the remaining 0.03%. This print drove a deceleration in the three-month trend. Below, we display the sequential evolution of the data:
The primary drivers of CPI inflation are food, energy, transport, and shelter. These components have contributed 0.02% (Food), 0.02% (Energy), -0.04% (Transport), and 0.1% (Shelter), respectively. We display these contributions to the 0.22% change in CPI below:
For further perspective, we show how these areas have accounted for the majority of variation in inflation both economically and statistically. Over the last year, food, energy, transport, and housing have contributed 0.34% (Food), -0.04% (Energy), 0.41% (Transport), and 1.52% (Shelter), respectively, to the change in inflation. We display these principal drivers of inflation over time below:
