SPXS - End Of 'Disinflation' Honeymoon: CPI Accelerates YoY Core Services CPI Accelerates MoM

2023-08-10 21:35:00 ET

Summary

• Core services inflation at 6.1% year-over-year; Core CPI at 4.7%. Three factors make it rough for CPI the rest of the year.
• Overall Consumer Price Index rose by 3.2% in July compared to a year ago, the first year-over-year acceleration since June 2022.
• The “Core” CPI rose by a still hot 4.7% in July, compared to a year ago, an increase that was a hair smaller than in June (+4.8%).

Core services inflation at 6.1% year-over-year; Core CPI at 4.7%. Three factors make it rough for CPI the rest of the year.

Overall Consumer Price Index rose by 3.2% in July compared to a year ago, the first year-over-year acceleration since June 2022, marking the end of the period of “disinflation” when the year-over-year inflation rate cooled.

There are three reasons that we already know (more in a moment) that will cause the year-over-year CPI rate to increase further in the second half of 2023 because the disinflation honeymoon (purple in the chart below) is now over.

The “Core” CPI rose by a still hot 4.7% in July, compared to a year ago, an increase that was a hair smaller than in June (+4.8%), according to data by the Bureau of Labor Statistics today.

July was the smallest increase since October 2021. Core CPI is a measure of underlying inflation that excludes the prices of food and energy products, which gyrate wildly in both directions.

The chart shows core CPI (red) and overall CPI (green). The year-over-year plunge in energy prices (still -12.5% in July despite the recent month-to-month increases!) pushed the overall CPI increases below those of core CPI. When energy prices stop plunging on a year-over-year basis, overall CPI will once again be above core CPI.

The tougher second half has started . We already know this, no forecasting required:

• Energy prices don’t plunge forever . Gasoline CPI has risen 11% since December, but is still down 19.9% year-over-year. Gasoline prices collapsed in the second half of 2022, and it’s against these much lower prices that year-over-year CPI changes will be measured for the rest of the year.
• The “base effect” is starting to fade . The “base” for today’s year-over-year calculation is July 2022, which was the month the surge of the CPI started cooling sharply, driven by plunging energy prices. Those lower values in the second half of 2022 will be the base for the year-over-year calculations going forward, leading to bigger year-over-year increases.
• The odious ridiculous “health insurance adjustment” ends with September and will swing the other way . I discussed this earlier today here . It pushed down the year-over-year CPI for health insurance by 29.5%, to January 2019 levels, which pushed down medical care services CPI into the negative, despite maddening price increases. But starting in October, it will swing the other way.

On a month-to-month basis, held down by the huge odious and ridiculous health insurance adjustment, core CPI increased by 0.2% in July, same increase as in June (red in the chart below). The three-month moving average of core CPI rose by 0.25% (blue).

Core Services inflation accelerated

The index for core services (without energy services) increased by 0.35% in July from June, a sharp acceleration from June (+0.25%).

This increase comes despite the odious, ridiculous, and massive adjustment to the CPI for health insurance that caused CPI for health insurance to plunge by 4.1% in July from June, which pushed the CPI for medical care services into the negative.

Year-over-year, the core services CPI rose by a still red-hot 6.1%, compared to 6.2% in July. Unrounded, the difference was minuscule, as the chart shows, 6.124% v. 6.159%.

Without the health insurance adjustment, core services CPI would have also accelerated on a year-over-year basis and would have been higher to begin with.

Note that the Medical Services CPI has turned negative, pushed down by the health insurance mega-adjustment.

The two CPIs for housing as a service (“shelter”)

“Rent of primary residence”: +0.41% for July, +8.0% year-over-year (red in the chart below). The July rate of 0.41% amounts to annualized growth rate of 5.0%.

The survey follows the same large group of rental houses and apartments over time and tracks what tenants, who come and go, are actually paying in these units.

Owners’ equivalent rent: +0.49% for July, +7.7% year-over-year (green). This is based on what a large group of homeowners estimates their home would rent for.

But “asking rents…” The Zillow Observed Rent Index (ZORI) and other private-sector rent indices track “asking rents,” which are advertised rents of vacant units on the market.

The ZORI’s huge spike in 2021 through mid-2022 never fully made it into the CPI indices because rentals don’t turn over that much, and not many people actually ended up paying those spiking asking rents.

In late 2022, asking rents in dollar-terms began to dip. But this year, the ZORI rose again and has been hitting new records in dollar terms.

The chart below shows the OER (green, left scale) through July as index values, not percent change; and the ZORI (red, right scale) through June, as index in dollars. Zillow has not yet released the July data.

The left and right axes are set so that they increase each by 50%, with the ZORI up by 45% since 2017 and the OER up by 30%:

Rent inflation vs. home-price inflation: The red line represents the OER. The purple line represents the Case-Shiller Home Price Index. Both lines are index values set to 100 for January 2000:

Durable goods prices stabilize at nosebleed levels

The CPI for durable goods – the index value, not percent change – has moved up and down at nosebleed levels, with a slight downward trend, since early 2022, following the spike from mid-2020 into early 2022.

In July, the index dipped by 0.3% from June, and by 1.4% from a year ago. It seems to be normalizing at those nosebleed levels with the same slight downtrend that it had before the pandemic for many years (due to hedonic quality adjustments in motor vehicles and consumer electronics).

Used vehicles CPI fell by 1.3% for the month, seasonally adjusted (green), and by 5.2% year-over-year, following the 52% spike from mid-2020 through mid-2022. Not seasonally adjusted (red), it edged down 0.2% in July from June.

The chart of the index value – not seasonally adjusted in red, seasonally adjusted in green – is an illustration of the wild pricing turmoil that persists to this day:

New vehicle CPI dipped by 0.1% for the month, the fourth month in a row of slight month-to-month dips, amid big price cuts by Tesla and other EV makers . But year-over-year, the index was still up 3.5%.

This leveling off follows a stunning price spike over the past two years. Very little of that spike has been reversed over the past four months, as this chart of the index value shows. Here too, prices appear to be normalizing at nosebleed levels with a slight downward trend:

Nondurable goods

The energy prices have begun to rise again month-to-month, with the CPI for gasoline rising all year. But year-over-year, energy prices are still way down.

Gasoline accounts for about half of the total energy CPI. It has been rising for seven months, and over the next few months will turn positive on a year-over-year basis, measured against the plunging prices in the second half of 2022. This will further push up overall CPI. You can see this dynamic in the CPI for gasoline as index value; the low point was December:

Food prices have begun to inch up again on a month-to-month basis, after a slight dip, following the devastating 24% spike during the pandemic.

The CPI for “food at home” – food bought at stores and markets – rose by 0.3% in July from June, driven by increases in beef, poultry, fish and seafood, fresh fruits, and fresh vegetables. So the inflation game of whack-a-mole is returning to store shelves? Year-over-year, prices rose 3.6%.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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