August 08, 2022
(The monthly Consumer Price Index (CPI) is scheduled for release by the Bureau of Labor Statistics on Wednesday, August 10th at 8:30 AM Eastern Time.)
The big story in the July CPI will be the drop in gas prices. The index is likely to drop at least 10 percent from its June level, knocking 0.5 percentage points or more off the inflation rate for the month. This will boost consumers’ purchasing power, which is good news for those worried about slowing growth or even a recession. It is, of course, bad news for the Federal Reserve Board, which is quite explicitly trying to slow growth.
Food Prices Might Stabilize
Food prices have also been a major contributor to inflation in the recovery, as worldwide demand, coupled with supply disruptions due to the pandemic and the Ukraine War, have led to shortages in many areas. It seems these disruptions are being largely overcome. Wheat prices have fallen back to below their pre-invasion level. World market prices for other commodities have stabilized or fallen in the last couple of months.
It is unclear how much of this turnaround will show up in the July CPI, but at the least we should see much slower inflation in food prices. The index for food at home rose 1.0 percent in June, after rising 1.4 percent in May. It is up 12.2 percent over the last year. Moderation of food inflation will be a big factor in slowing the overall rate of inflation, as well as a big help to consumers.
Rental Inflation
The two rent components are hugely important in the CPI, comprising almost 31 percent of the overall CPI and nearly 40 percent of the core index. Inflation in the rental components has increased rapidly in recent months, with the monthly inflation rate for owners equivalent rent hitting 0.7 percent in June and the rate for rent proper hitting 0.8 percent.
The Fed’s interest rate hikes have had the most direct impact on the housing market, as the resulting jump in mortgage rates headed off an incipient bubble in house sale prices. While house sale prices and rents generally go in the same direction, the relationship is not direct.
Fewer people buying homes will help the rental market if it reduces the number of families owning multiple homes and frees up space by reducing the number of people moving up into bigger homes. While higher mortgage rates have surely had this effect, it is unclear how large the impact will be and whether it is still too early to see its effect on rents.
Apparel, Furniture, Appliances, and Other Supply Chain Problem Areas
The inflation in the recovery has been fueled substantially by rapid price increases in a number of items where prices are typically flat or even falling. This was due to the inability of the supply chain to accommodate the huge increase in demand for goods that we saw in the middle of the pandemic. Most of these items are now in ample supply as non-auto inventories are far above their pre-pandemic levels.
Major retailers have publicly complained about being overstocked with many items and no longer enjoy the pricing power they had last year. Nonetheless, there was no evidence of this overstocking in the June CPI; for example, apparel prices rose 0.8 percent. Presumably, overflowing inventories will affect prices at some point, so perhaps we will see some fall in these areas in July.
Cars and Trucks
New and used vehicles are a special category in the supply chain crisis. The cause of the supply chain problem was a fire at a huge semiconductor factory leading to a worldwide shortage. Other producers have now come online, and there are complaints of a glut of semiconductors. Nonetheless, many manufacturers have still not recovered to their pre-pandemic pace of production. New vehicle prices rose 0.7 percent in June, while used vehicle prices rose 1.6 percent. It is likely that we will see some moderation of these price rises, if not actual reversals.
Health Care Insurance
The index for health care insurance rose 2.1 percent in July. It has risen 17.3 percent over the last year, adding just under 0.2 percentage points to the year-over-year rate of inflation. This component only measures the administrative costs and profits of insurers, not premiums. It is unclear why this should be rising so rapidly.
In prior years, there would be a period of rapid price rises in this index, followed by periods in which it was flat or even trending downward. Conditions of competition, as well as regulation, are likely major factors in the movement of this index.
Many Factors Point to Moderating Inflation in July
The sharp drop in gas prices since June virtually guarantees a low overall inflation rate for June. This is good news, but the big question will be whether we see moderation in the core components of the CPI. Some of us have been expecting to see this moderation for some time, but it has not yet come.
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.
