April 11, 2022
(The monthly Consumer Price Index (CPI) is scheduled for release by the Bureau of Labor Statistics on Tuesday, April 12 at 8:30 AM Eastern Time.)
With the core and overall CPI rising at unusually rapid rates, analysts will be looking at the March data for evidence that inflation is either accelerating or slowing.
The inflation dove’s view is that we had one-time increases in many areas due to supply chain problems associated with reopening after the pandemic shutdown. These problems are being resolved, albeit slowly, which should mean that many of the price jumps seen over the last year will be largely reversed over the year.
The item that tops the list in the price reversal category is used vehicles. The index for used vehicles prices has risen by more than 50 percent over the last two years and added almost 1.4 percentage points to the overall inflation rate over this period. The Manheim Used Vehicle Index has fallen almost 6.0 percent since January. This should mean that we will see a substantial fall in the CPI measure. The CPI index for used vehicle prices fell 0.2 percent in February. (The overall pattern in the two indexes has been close, even though they vary considerably month to month.)
We may also see some decline in new car prices. The major auto manufacturers continue to face supply chain issues, both from the shortage of semiconductors and now the war in Ukraine, but demand appears to be weakening, partly in response to higher interest rates. New vehicle prices have risen 12.4 percent over the last year, adding 0.5 percentage points to the inflation rate.
There are many other items where one-time increases pushed inflation upward in the last year. For example, the index for household furnishings and supplies rose 10.3 percent over the last year. The index for apparel rose 6.6 percent, and the index for sporting goods rose 7.1 percent.
In all of these categories, imports account for a large portion of domestic demand. This means the price increases are either due to higher import prices or increased shipping costs. With some evidence that shipping costs are edging downward, we may begin to see the sharp price rises in these areas start to reverse or at least level off.
The rent components account for 31.5 percent of the overall CPI and almost 40 percent of the core index. They have been increasing somewhat more rapidly in recent months, with the rent proper index up 4.2 percent over the last year and the owner’s equivalent rent index up 4.3 percent. This is still far less than most private indexes, although these indexes only measure units that change hands, as opposed to all housing units, which is the coverage of the CPI.
The recent rises in mortgage interest rates could be dampening demand to some extent, making it more expensive for people to own multiple homes. Higher rates can also dampen construction, but with a large backlog of demand in most areas, we are not likely to see that negative effect any time soon. The net effect should be that the rent indexes will be rising at a 4.5 to 5.0 percent annual rate in the next few months, but there will be little acceleration from these rates.
Gas and energy prices will show large jumps in March. We know this from the soaring oil prices and private measures of gas prices. The bad news in March should be largely reversed in April, as oil prices have been heading back down. The war creates a huge amount of uncertainty with energy prices. However, if we do not see a large amount of Russian oil removed altogether from world markets (as opposed to diverted to other countries), we are unlikely to see oil prices go back up near their March peaks.
The inflation hawk’s view is that we are facing a wage-price spiral, with the general pattern towards higher inflation, at least until we see substantial increases in unemployment putting downward pressure on wages and inflation.
The key issue in the March report will be if inflation is accelerating or slowing. The core inflation rate was 0.5 percent in February, down from 0.6 percent the prior two months. One month is never conclusive, but the direction of change will be the most important new information in this report.
CEPR produces same-day analyses of government data on employment, inflation, GDP, and other topics. Follow @DeanBaker13 on Twitter to get his quick-take analysis of government data immediately upon release.