September 08, 2022
(The monthly Consumer Price Index (CPI) is scheduled for release by the Bureau of Labor Statistics on Tuesday, September 13th at 8:30 AM Eastern Time.)
The CPI was flat in July as a sharp drop in gas prices fully offset rises in other components. We are likely to see a similar story in the August data, as gas prices continued their sharp decline throughout the month. In fact, it is very possible that the overall figure will be negative, as core inflation is likely to be somewhat lower than in August, and inflation in food prices also seems to be slowing.
Further Slowing in Rental Indexes
There was a modest slowing in both the rent proper and owners’ equivalent rent indexes in July, as they rose 0.7 and 0.6 percent, respectively. Each is 0.1 percentage point lower than the June rate. This pace is still very fast. Because of rent’s huge weight in the CPI (almost 31 percent in the overall index and almost 40 percent in the core), rapid growth in the rental components almost guarantees high CPI inflation.
The data over the last month show that the Fed’s rate hikes had a large impact on the house sale market. New and existing home sales are down by roughly 20 percent from year-ago levels. Inventories of unsold homes have risen rapidly, and sales prices have been falling by many measures for the last few months.
This could lead many would-be sellers to rent out their homes instead, leading to downward pressure in rental markets. (Roughly 30 percent of rentals are single family homes.) It is not clear how much this shift is happening yet, but if it does, it could help to ease the tightness in the rental market. It is also worth noting that while the Fed rate hikes have slowed new housing starts, the pace of completion has actually increased. This is due to the easing of supply chain problems that had blocked the completion of many units.
New and used vehicles were again net contributors to inflation in July. While used vehicle prices fell 0.4 percent in the month, new vehicle prices more than offset this drop with a gain of 0.6 percent. New and used vehicle prices are up 10.4 percent and 6.6 percent over the last year, respectively.
It appears that manufacturers are finally overcoming the chip shortage that has been slowing production for the last two years. The Federal Reserve Board’s industrial production measure showed motor vehicle production was above its pre-pandemic pace in July. Inventories have risen sharply in recent months and are now 18.1 percent above year-ago levels.
Increased production and the hit to demand from higher interest rates on car loans should lead to downward pressure on prices. Both new and used vehicle prices will likely decline in August.
Supply Chain Items
A wide range of items have driven inflation in the last year and a half due to supply chain problems. The backlog at the ports has been largely eliminated and shipping costs have plunged. Although they are still well above pre-pandemic levels, many of these price hikes should be reversed.
Television prices provide the best example of an item where supply chain problems had driven price hikes last year. TV prices are now well below pre-pandemic levels. However, prices for items like apparel, furniture, and appliances are still well above pre-pandemic levels and have continued to rise in many cases.
We should see more price reversals in August. For example, apparel prices fell 0.1 percent in July, but this followed increases of 0.7 percent in May and 0.8 percent in June. They should decline more sharply in August. Furniture prices rose 0.9 percent in July and are up 14.8 percent over the year. Appliance prices fell 0.6 percent in July but are still up 5.4 percent over the last year. These items, which had pushed inflation higher in the last year, should now be slowing it.
Price increases for most medical services have remained reasonably modest, with the major exception of health insurance, which has risen by 20.6 percent over the last year and 2.2 percent in July. The insurance index is always erratic and can have sharp reversals. For example, the index rose 9.1 percent from August 2015 to August 2016, and then dropped 0.1 percent in each of the next four months. The pattern of rapid increases could continue, but reversals are possible.
Food Prices Moderating
Food has also been a major driver of inflation in the pandemic recovery. Store bought food prices rose 1.3 percent in July and 13.9 percent over the last year. There is some evidence that prices may be moderating. Beef prices in world markets have been falling for several months, and chicken prices also are falling now that the stocks have largely recovered from the Avian flu. Some moderation here will slow the overall CPI and put money very directly in family’s pockets.
Moderation in August Means the Fed Can Wait
If the CPI is zero or a small negative in August, it will strengthen the case for pausing the Fed’s aggressive rate hikes. Consumers’ expectations are following overall inflation, not the core. With overall inflation at zero in July and gas prices falling sharply through August, inflation expectations have been trending downward. At present, the Fed has little to fear about a wage-price spiral.
It’s also worth noting that zero inflation in July and August will mean real wages would have risen sharply over the last two months. Zero inflation in August will mean that the real average hourly wage for production and nonsupervisory workers will be roughly back to their pre-pandemic peak. For the low-paid workers in leisure and hospitality, it will be almost 4.0 percent higher. This reality is at odds with the stories of widespread hardship in the media.
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.