June 08, 2023
Preview: What to Look for in the May CPI
(The monthly Consumer Price Index (CPI) is scheduled for release by the Bureau of Labor Statistics on Tuesday, June 12 at 8:30 AM Eastern Time.)
Inflation has been trending downward for the last year. If this trend continues, the Fed can declare victory and focus on the employment side of its mandate. However, inflation is still well above the Fed’s 2.0 percent target, so the question is whether the downward path is continuing or whether we have hit a plateau.
Non-Core Inflation
We tend to focus on core inflation, since the food and energy components are so erratic. However, insofar as the concern is that inflation is becoming embedded, inflation from the non-core components can be as much of a problem as core inflation. These are also prices that people see all the time, so they matter a great deal to people’s perceptions of inflation.
Both energy and food prices were big contributors to the 2021 rise in inflation. The run-up in energy prices associated with the reopening from the pandemic, and then Russia’s invasion of Ukraine, has largely been reversed. The price of oil and gas is not out of line with its pre-pandemic levels. It is not likely that we will see large changes in energy prices in the May data.
Food prices have fallen the last two months, with some of the items that saw large price increases earlier, notably eggs, which saw huge price rises due to the Avian flu, falling sharply in price. With the price of many farm products having fallen sharply in recent months, it is likely that we will see another decline in food prices in May.
New and Used Vehicles
New and used vehicles together account for more than 8.5 percent of the core CPI. While some supply chain problems persist, it seems that new vehicle prices have finally peaked. They edged down by 0.2 percent in April, but are still more than 20 percent above their pre-pandemic level. Used vehicle prices are on a downward path, having fallen by 6.6 percent over the last year, but were still almost 40 percent above the pre-pandemic level last month. In both cases, we can anticipate price declines over the rest of this year, but the monthly movements will be erratic.
Other Supply Chain Items
There is still room for further price declines in many other items that saw large price increases during the pandemic. The price of major appliances is more than 10 percent above its pre-pandemic level. Their prices had been on a downward path before the pandemic. Apparel prices are more than 6.0 percent above their pre-pandemic level. They had also been following a downward trend before the pandemic. We should see further price declines in both areas.
Rental Inflation
The slower pace of rental inflation in the private indexes of marketed units is now showing up in the CPI rental indexes. The CPI showed a rise of 0.6 percent in the rent index in April and 0.5 percent in the owners’ equivalent rent index. Monthly inflation in both indexes had been running at a 0.8 percent pace at the end of last year.
With the indexes of marketed units now showing slower inflation than before the pandemic, we should see a further decline in the pace of rental inflation. The slowing seen to date is somewhat ahead of predictions from the Council of Economic Advisers, but this can be explained by the sharp rise in vacancy rates reported by the Commerce Department.
Core Non-Shelter Services
The Fed has indicated that it is placing considerable importance on the rate of inflation in core non-shelter services, which it apparently views as being driven largely by wage pressures. There are reasons for questioning this view, as many have pointed out, since the price of goods plays a large role in the price of many of these services.
However, with prices for items like food and car parts now falling or stable, we should be seeing some slowing in the price of services like restaurant meals and car repairs. In addition, the rate of inflation in auto insurance prices, which accounts for roughly 10.0 percent of this category, should slow. The index has risen by 15.5 percent over the last year.
Wage growth has also slowed sharply from the start of 2022. The annual rate of wage growth in the Average Hourly Earnings series over the last three months was just 4.0 percent, only slightly higher than the pace seen in 2018 and 2019 – and down from a more than 6.0 percent rate at the start of last year.
Overall Picture
We are likely to see a further slowing of inflation in May. The overall CPI figure for April jumped to 0.4 percent due to a surge in energy prices. This will not happen again, and with falling food prices we are likely to see an overall figure close to 0.2 percent. With some erratic jumps in items like used cars and apparel being reversed in May, along with further slowing in the rental indexes, we are likely to see a core rate for the month of 0.3 percent.
