Inflation Preview: What to Look for in January’s CPI Release

February 13, 2023

The monthly Consumer Price Index (CPI) is scheduled for release by the Bureau of Labor Statistics on Tuesday, February 14th at 8:30 AM Eastern Time.

We had been seeing good news on inflation in the CPI over the last six months with inflation in the core slowing to a 4.5 percent annual rate, while the overall CPI rose at just a 1.9 percent rate, held down by a sharp drop in gas prices. This will not be the case in January, as gas prices rose from December. We also will see some reversal of factors that had held down the core, notably health care services where higher government payments will show up as higher prices. On the other side, we may be starting to see a slowing of rental inflation, which will be a major factor dampening inflation in 2023.

Gas Prices

After a huge run-up in the first half of 2022, gas prices fell sharply in the second half of the year, ending the year 1.5 percent lower than in December of 2021. Oil prices seem to have settled into a $70 to $80 a barrel range, which is consistent with gas prices around $3.00 a barrel, roughly the levels we saw in December. Barring another major disruption in world oil markets, there should be little clear direction in gas prices going forward.

Food Prices

The price of store-bought food has risen by 11.8 percent over the last year, with items like milk and eggs rising far more rapidly. The food price index is now more than 20 percent above its pre-pandemic level. We saw some improvement in December, with food prices rising just 0.2 percent in the month. The price of many food items fell. For example, milk prices dropped by 1.0 percent in December, but were still up 12.5 percent over the last year. Chicken prices fell 0.6 percent, leaving them 12.2 percent above their year ago level.

It is likely we will see some further improvements in January. The pandemic run-up in the price of farm prices in many areas has been reversed. Wheat prices peaked following the invasion of Ukraine at levels that were more than double their February 2020 level. They have since fallen back to a level that is around 20 percent above their pre-pandemic level and only slightly higher than their level from ten years ago.

There is a similar story with coffee, soybeans, and a number of other farm products. Even egg prices at the wholesale level have started to fall sharply. The drop in commodity prices, combined with a huge drop in shipping prices from pandemic peaks, should mean lower prices in stores. This may not mean big declines in prices at the store any time soon, but the big increases from the last two years should be behind us.

Pandemic Supply Chain Goods

There were a wide variety of items, from new and used cars, to appliances and apparel, where we saw sharp price increases in 2021 and 2022 due to supply chain problems. At this point, inventories of these items are pretty much back to normal, or above, with the exception of new vehicles, where a backlog of orders is still having an impact.

We have been seeing price declines for many of these items through fall 2022, which will likely continue into January and much of 2023. Prices of new vehicles fell by 0.1 percent in December, the first decline since January of 2021. They are 20.0 percent above their pre-pandemic level. In the decade prior to the pandemic they were virtually flat. We will likely see further declines in both new and used car prices in January.

Rental Inflation Likely to Slow

Rent is a huge chunk of the CPI, accounting for more than 31 percent of the overall CPI and almost 40 percent of the core. Over the last year the rent proper index rose 7.6 percent, while the owners’ equivalent rent index rose 7.5 percent. Both indexes rose 0.8 percent in December.

We know from private indexes of marketed units that inflation in the CPI index will soon slow sharply. The exact timing is not clear, but we will likely see somewhat slower inflation in the rental components in January. It is worth noting that, in spite of the slowing in housing starts, there are more housing units under construction now than when the Fed started raising rates. As these units get completed it will place further downward pressure on rents.

Non-Rent Core Services

Federal Reserve Board Chair Jerome Powell has indicated that he is paying special attention to this component of the index, where inflation may still be a problem. The argument is that rapid wage growth is likely to be passed on fairly directly into rapid price growth in these services.

There are some issues that complicate this view. For example, in both auto repairs and auto insurance, the cost of car parts is a major factor. The index for motor vehicle parts and equipment is up 9.9 percent over the last year and has not yet begun to reverse.

The index for food away from home is affected by government subsidies and their withdrawal. The CPI index for school lunches has risen 129.6 percent over the last year, due to ending of special pandemic subsidies. This component accounts for less than 0.1 percent of the overall CPI, but still added almost 1.9 percentage points to the food away from home index over the last year.

Insofar as prices of non-rent core services are driven by wages, we should see a downward trend over 2023. Wage growth has slowed sharply by every measure, even if it may still be somewhat higher than is consistent with the Fed’s 2.0 percent target over the long-term.

Mixed Picture in January

After seeing mostly good news on inflation through the second half of 2022, we are likely to see a more mixed picture in the January CPI. The biggest negative will be the rise in gas prices for the month. However, quirks in the measurement of health care prices are also likely to push the index higher.

On the other side, we should see continued price declines in the items where supply chain problems pushed up prices in the pandemic. We may also see a better picture with food at the grocery store and we may start to see some moderation in rental inflation.

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