July 11, 2022
(The monthly Consumer Price Index (CPI) is scheduled for release by the Bureau of Labor Statistics on Wednesday, July 13th at 8:30 AM Eastern Time.)
Looking at the June data, the big question will be whether we are finally seeing evidence of slowing in the index. May was a bad month for inflation with the overall CPI rising 1.0 and the core index rising 0.6 percent. There are many data points indicating inflation will be slowing — major retailers report gluts of unsold goods, private indexes of rental units now show declines in many cities, and used car prices appear to be on a downward path. The question is, how much of this will show up in the CPI and when?
There is a wide range of items where we typically see flat or falling prices, but the prices rose sharply in the last year. This list includes apparel, household furniture, car parts, and appliances. The soaring prices for these items were directly linked to supply chain disruptions. These were the goods sitting in boats waiting to off-load in California and elsewhere.
Now that supply chain problems have been largely resolved, we should expect to see some price declines in these areas. Non-auto inventories at retailers are now more than 25 percent higher than their pre-pandemic levels. This should mean price declines in many areas.
Televisions were the first item in this category to reverse price increases. Television prices rose sharply from March to August of 2021. Since then, prices have fallen sharply, and are now below their March 2021 level.
Appliances are another item where we will likely see falling prices in June. Appliance prices fell 0.7 percent in May but are still 6.4 percent above their year-ago level.
We have yet to see any price declines in apparel, with the index standing 5.0 percent above its year-ago level; household furnishings, whose prices are up 9.7 percent over the last year; and car parts prices, which have risen by 15.3 percent since May 2021.
It is likely that we will be seeing large and sustained price declines for these and other items. The question is how much of these declines will show up in June.
House sale prices soared by more than 30 percent nationwide during the pandemic. The Fed’s rate hikes seem to have quickly taken the air out of this market. Applications for purchase mortgages are down by close to 20 percent year-over-year, inventories of unsold homes have soared, and many sellers are now reducing their list prices.
It appears that this trend has already spread over to the rental market, with indexes of market rents now showing month-over-month declines in many cities. The rental indexes are hugely important to the inflation measures, accounting for more than 30 percent of the overall index and almost 40 percent of the core index.
The monthly inflation rate for both the rent proper and owner equivalent rent indexes have accelerated sharply this year, coming in at more than 0.6 percent in May. It is likely there will be some slowing in June, although we will almost certainly still see a rapid rate of rental inflation.
New and Used Vehicles
The semiconductor shortage has severely constrained vehicle production over the last year. This has led to sharp price increases, which have been major contributors to inflation. The major manufacturers are getting closer to normal production schedules, although new supply chain problems are arising due to the COVID-19 shutdowns in China.
Nonetheless, we are likely to see some slowing in new vehicle prices, which rose 1.0 percent in May, and likely some decline in used vehicle prices, which rose 1.8 percent in May.
The inflation rate for most categories of medical services has remained reasonable through most of the recovery, with the major exception of health care insurance. The index for health care insurance rose by 13.8 percent last year. It rose 1.3 percent in May after rising 3.1 percent in April. This index tends to be erratic, having stretches of rapid increases followed by long stretches where it is stable or even falling. There is no obvious logic to the patterns, so we’ll see which way it goes in June.
Higher energy prices have been a huge factor in inflation over the last year. After rising 4.1 percent in May, gas prices are likely to show only small increases in June. Prices were up at the start of the month but fell rapidly towards the end. This follows the pattern in world oil prices. We should see further drops in gas prices in July based on the decline in oil prices.
Overall Picture – Moderating Inflation
June should be showing a much better inflation picture than we saw in May. There should be many more categories where prices are actually declining. Problem areas like rent and gas should at least show slower growth. Both the core and overall CPI will be showing a higher rate than the Fed would feel comfortable with, but the direction of change should be good news.
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.