Inflation Whac A Mole. Housing Inflation may be peaking at 8%+, but rents re-accelerated.
By Wolf Richter for WOLF STREET.
The Consumer Price Index (CPI) for April, released today by the Bureau of Labor Statistics, was marked by a very unwelcome reversal in durable goods prices which suddenly jumped again month-to-month. This was driven by a spike in used vehicle prices. A month ago, we explained why this spike would happen, based on underlying dynamics in prior months and called it a “turning point” in used vehicle prices. Today, it looks like a U-turn.
Services inflation remains red hot, but was somewhat moderated by a sharp drop in airline fares, rental cars, and by the infamous and huge adjustment of the health insurance CPI that started in September 2022 and will continue to wreak havoc with services CPI through September 2023.
This combination of the month-to-month jump in durable goods and the slight moderation in month-to-month services caused the “core” CPI (overall CPI minus food and energy) to remain stuck for the fifth month in a row at around 5.5% — it’s now higher than overall CPI.
Inflation, once it reaches this level, is a game of Whac A Mole. As you hammer one category down, another one re-pops up.
The huge “base effect” is something we’re going to be talking about here a lot over the next few months because it is now pushing down year-over-year CPI readings through June, but will reverse in July and push them up in July and in the entire second half.
This “base effect” is the result of the surge of CPI last year through June, which forms the base for the year-over-year comparisons now. But last July, the index kinked with a month-to-month negative reading (on a plunge in energy prices and dropping durable goods), and the overall CPI curve then flattened out for the rest of the year. This flatter curve will be the base for the year-over-year readings in the second half, and the reversing “base effect” will push up year-over-year readings. This is already baked in. Something to look forward to.
Inflation at a glance by major category:
- Services without energy services jumped by +6.8% from a year ago – after +7.1% in March and the four-decade high of +7.3% in February – fueled by housing, food services, auto insurance, auto repair, pet services. But declines in airline fares and rental cars pulled the other way. The infamous and huge health insurance adjustment also pulled the other way and will continue to do so through September.
- Food at home: inflation dipped in April from March, the second monthly decline in a row (-0.2%). Year-over-year, prices increased (+7.1%) at the slowest rate since January 2022.
- Energy inflation month to month rose (+0.6%) which slowed the year-over-year decline (-5.1%). Prices of gasoline rose for the month, but were still down (-12.2%) from a year ago.
- Durable goods CPI jumped month-to-month (+0.8%), the second month in a row of increases, after six months of declines, driven by a huge spike in used vehicle prices. This whittled down the year-over-year decline toward the flat line (-0.2%).
- Core CPI, on a month-to-month basis (+0.4%) has been in the same range for the fifth month in a row. On an unrounded basis, April was a little hotter than in March. Year-over-year, core CPI (+5.5%) has been stuck in the same range for the fourth month in a row.
- Overall CPI (CPI-U) accelerated month to month (+0.4%), but year over year moderated to +4.9%.
- Core CPI higher than overall CPI for the second month in a row. After the plunge in energy prices and the softening food prices, overall CPI has come down a lot, to +4.9% in April, while core CPI has gotten stuck at 5.5%.
“Core” CPI – which excludes the volatile food and energy products that consumer buy – jumped by 5.5% year-over-year in April, compared to 5.6% in March and 5.5% in February. Unrounded the difference was even smaller: 5.52% April versus 5.59% in March. Core CPI has been stuck in this very narrow range of 5.5% to 5.7% for the past five months without any meaningful improvement. This is what’s called “sticky inflation”:
Month-over-month, core CPI jumped by 0.4%, same as in March. Unrounded, April (+0.41%) was a little hotter than March (+0.38%), shown by the black line in the chart below.
The three-month moving average of core CPI smoothens out the big monthly ups and downs and shows the trend a little more clearly (red line):
Core Services inflation (without energy services) jumped by 6.8% year-over-year in April, compared to 7.1% in March and the 40-year record of 7.3% in February. Nearly two-thirds of consumer spending goes into services.
Month-to-month, services inflation without energy services jumped by 0.4% in March (0.36% unrounded), down from the 0.45% jump in March and 0.62% jump in February (black line). The three-month moving average is the red line.
The infamous adjustment to health insurance is included in medical care services, and pushed the otherwise surging medical care services index into the negative for the month, and toward the flatline year-over-year. This adjustment ends in September:
|Major Services without Energy||Weight in CPI||MoM||YoY|
|Services without Energy||62.1%||0.4%||6.8%|
|Motor vehicle insurance||2.6%||1.4%||15.5%|
|Motor vehicle maintenance & repair||1.1%||0.5%||13.3%|
|Pet services, including veterinary||0.5%||2.7%||10.4%|
|Food away from home (food services)||4.8%||0.4%||8.6%|
|Rent of primary residence||7.5%||0.6%||8.8%|
|Owner’s equivalent of rent||25.4%||0.5%||8.1%|
|Postage & delivery services||0.1%||0.2%||6.9%|
|Hotels, motels, etc.||1.0%||-3.4%||3.5%|
|Recreation services, admission, movies, concerts, sports events||3.1%||0.2%||5.8%|
|Other personal services (dry-cleaning, haircuts, legal services…)||1.4%||1.5%||6.3%|
|Video and audio services, cable||1.0%||0.6%||5.7%|
|Water, sewer, trash collection services||1.1%||0.3%||5.4%|
|Medical care services & insurance||6.5%||-0.1%||0.4%|
|Education and communication services||4.9%||0.1%||3.1%|
|Tenants’ & Household insurance||0.4%||0.5%||1.4%|
|Car and truck rental||0.1%||-3.2%||-11.2%|
Health insurance mega-adjustment understates CPI, core CPI, services CPI, and Medical Services CPI through September.
BLS undertakes annual adjustments in how it estimates the costs of health insurance and then spreads those adjustments over the following 12 months. For the 12 months through September 2022, CPI overstated health insurance inflation (+28% yoy in September 2022). That overstatement has been getting deducted every month, starting with the first mega-adjustment in October 2022 (more here),and this will continue through September 2023.
The Fed’s favored inflation measure, the PCE price index, figures health insurance inflation differently and doesn’t suffer these adjustments.
The CPI for housing as a service.
The CPI for housing as a service is based on rent factors, primarily “Rent of primary residence” (weight: 7.5% of total CPI) and “Owner’s equivalent rent of residences” (weight: 25.4% of total CPI).
“Rent of primary residence” tracks actual rents paid by tenants in houses and apartments. The survey follows the same large group of housing units over time and tracks what their tenants, who come and go, are actually paying in these units.
No-no-no… not “asking rents.” Other rent indices, such as the Zillow rent index, track “asking rents,” which are advertised rents of vacant units on the market. The huge double-digit spike last year in asking rents never fully made it into the CPI indices because rentals don’t turn over that much, and proportionately not many people actually ended up paying those spiking asking rents. Now those asking rents have backed off from that spike, but this backing off won’t be fully reflected either since the spike wasn’t fully reflected to begin with.
Both CPI rent factors jumped:
- Rent of primary residence: +0.6% for the month, an acceleration from the prior month; + 8.8% year-over-year, same as in March and February, and the worst since 1982 (red).
- Owners’ equivalent rent +0.5% for the month, +8.1% year-over-year, a new record, and the worst in the data (green).
We can now see that the month-to-month increases are less hot than they were, and that year-over-year increases are peaking. I spelled out here why, based on data from landlords, CPI for rent may not back off nearly as much as now taken for granted by just about everyone, from Powell on down.
Compared to home price inflation: The Case-Shiller Home Price Index peaked with the report named “June” then started to decline [by city: The Most Splendid Housing Bubbles in America].
Nearly every spring, there is a seasonal uptick in the Case-Shiller Index, followed often by declines, and you can see this in the little wobbles between 2010 and 2019. The pandemic-surge blew up any seasonality. But now, in the cooling market, the seasonality is back with the first little uptick in the most recent data point (purple line).
The red line represents “owner’s equivalent rent of residence.” Both lines are index values, not percent-changes of index values:
Durable goods prices jump as used vehicle prices blow out
A month ago, when the first month-to-month uptick in the durable goods CPI appeared, after two flat months, and after several months of sharp declines, I called it “a very unwelcome development.”
And in April, used vehicle prices blew out and pushed up overall durable goods by 0.8% for the month. This reduced the year-over-year drop to just -0.2%, so essentially flat.
Used vehicles CPI spiked by 4.4% in April from March, a huge jump. A month ago, I explained why this would happen, based on wholesale prices which had been surging for months, and based on inventories, which remained very tight, and based on demand, which outstripped supply, with not enough vehicles from fleets and lease returns coming into the used vehicle market.
Enough people – not all – have gotten used to the still sky-high prices and are once again paying whatever, it seems, a very unwelcome development for overall inflation dynamics. This chart shows the used vehicles CPI as index values, not percent change, and you can see the U-turn used vehicles made.
New vehicle prices have started to dip, amid growing supply and higher incentives by automakers and big price cuts by Tesla and some other EV makers, after a ridiculous surge in prices over the past two years. So now, new vehicle prices may decline for a while, as part of the inflation Whac A Mole game, only to pop up again, used-car like, in the near-ish future.
|Durable goods by category||MoM||YoY|
|Durable goods overall||0.8%||-0.2%|
|Information technology (computers, smartphones, etc.)||-0.1%||-9.4%|
|Sporting goods (bicycles, equipment, etc.)||-0.3%||0.0%|
|Household furnishings (furniture, appliances, floor coverings, tools)||-0.4%||4.8%|
The CPI for “food at home” – food bought at stores and markets – dipped by 0.2% in April from March, after the 0.3% dip in March.
Year-over-year, the CPI for food at home rose by 7.1%, the least-hot increase since December 2021, after a year of double-digit increases.
This chart shows the index value of CPI food at home. Note the surge through August last year, then the less-steep curve through February, and the kink in the curve in March and April. The index is 18.6% higher than two years ago:
Many of the major categories declined on a month-to-month basis.
|Food at home by category||MoM||YoY|
|Overall Food at home||-0.2%||7.1%|
|Cereals and cereal products||0.2%||11.3%|
|Beef and veal||0.3%||-0.5%|
|Fish and seafood||-0.7%||2.0%|
|Dairy and related products||-0.7%||8.0%|
|Juices and nonalcoholic drinks||0.4%||10.4%|
|Fats and oils||-0.4%||13.8%|
|Baby food & formula||4.3%||8.8%|
|Alcoholic beverages at home||0.0%||3.6%|
The biggest part here is the month-to-month surge in gasoline prices, that pushed overall energy CPI up by 0.6% for the month. But year-over-year, all major energy components except electricity are down sharply. Energy was a big contributor in the surge of the overall CPI in 2021 and the first half of 2022 and it is now a big contributor in moderating overall CPI.
|CPI for Energy, by Category||MoM||YoY|
|Overall Energy CPI||0.6%||-5.1%|
|Utility natural gas to home||-4.9%||-2.1%|
|Heating oil, propane, kerosene, firewood||0.0%||-15.2%|
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