Paul Krugman, an authority in economics and Noble Prize winner, commented on Friday's inflation data that showed a further easing in pricing pressure, prompting an increase in the odds of rate cuts.

Inflation War Won? "Inflation looks beaten," said Krugman in a post on X, formerly Twitter. The Bureau of Economic Analysis' personal income and spending report released on Friday showed that the annual rate of the personal consumption expenditure index (PCEI) came in 2.6%, marking the lowest level since March 2021. The metric is considered the Fed's favorite inflation gauge.

Sharing a chart of the annual rates of PCEI and the core PCEI, Krugman said, "The blip a few months ago looks like start-of-year price resets, and what's left is lagged housing costs."

Why It's Important: Consumer price inflation rose to a high of 9%+ in the summer of 2022 and has been trending broadly downward. The CPI, which was at 3.1% at the start of this year, jumped slightly to 3.5% in March and fell to 3.4% in April. Krugman attributed the spike seen earlier this year to "start-of-year price resets."

One significant factor keeping the CPI inflation above the Federal Reserve's 2% threshold is shelter costs. Home prices are not included in inflation calculations because they are considered an investment by the Bureau of Labor Statistics. However, the CPI does include rents and "owners' equivalent rents," which estimate the amount a homeowner might charge if they rented out their own home.

Shelter costs accounts for 30-40% of the CPI.

The BLS collects data for calculating the CPI every month, but the rent included is the amount negotiated at the start of the lease, which may have been set well before that particular month. Therefore, economists often regard this number as a lagging indicator.

The inflation number is particularly important, as the Federal Reserve has maintained the Fed funds rate at a 22-year high. A reduction in interest rates could kickstart growth and have a cyclical effect on the economy.

For the stock market, which is rallying due to a sharp spike in shares of select stocks tied to artificial intelligence technology, a rate cut could mean additional gains. Lowering rates is seen as a positive for interest-rate-sensitive companies, potentially leading to a rise in stock prices and a broadening of the rally.

That said, inflation truthers such as Peter Schiff have warned that inflationary pressure will reignite in the near- to medium-term.

The iShares TIPS Bond ETF (NYSE:TIP), an ETF tracking the investment results of an index composed of inflation-protected U.S. Treasury bonds, ended Friday's session down 0.31% at $106.78, according to Benzinga Pro data.

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