March 08, 2022
(The monthly Consumer Price Index (CPI) is scheduled for release by the Bureau of Labor Statistics on Thursday, March 10 at 8:30 AM Eastern Time.)
Both the overall and core CPI rose by 0.6 percent in January. This brought the year-over-year inflation to 7.5 percent and 6.0 percent in the overall and core CPI, respectively.
While this continued the pattern of high monthly inflation rates, there is a reason for expecting some moderation in February. Most notably, we may finally be seeing vehicle prices beginning to level off and come down. In January, new vehicles prices were flat for the first time since March. (They had been trending downward modestly before the pandemic.)
The used vehicle price index has increased by more than 50 percent since the start of the pandemic, adding more than 1.0 percentage point to the annual inflation rate over the last two years. The Manheim index of used car prices dropped 1.5 percent from its January level in the first half of February. It is likely that this decline will also show up in the CPI February used vehicle index.
Another piece of evidence that the backlog of demand for cars may be easing is the drop in the index for rental cars. This fell 7.0 percent in January after falling 2.7 percent in December. Car rental agencies had sold much of their fleet at the start of the pandemic. They were having difficulty rebuilding them as the economy reopened, which led to a serious shortage of rental cars and large increases in prices.
The large price drops in the last two months indicate that the rental agencies have largely rebuilt their fleets, and the market is moving back towards normal. If that is the case, it would also mean that rental agencies are no longer buying an excessive number of cars, leaving more for households.
It is also likely that some of the big price increases in January were one-time increases, with companies using the new year as an opportunity to increase prices. For example, the index for cereals and bakery products rose 1.8 percent in the month of January, after rising a total of 4.8 percent in the prior year. Prescription drug prices rose 1.3 percent in January, after being flat over the prior year.
While companies may typically raise prices at the start of the year, the seasonal adjustment would not correct for an unusually large January price rise. If that is the case, we should see a number of items with much smaller price increases in February and subsequent months.
With non-auto retail inventories now at normal levels, we may see some leveling off or decline in items where supply chain issues were a major problem. Apparel may be at the top of this list, with the index rising 1.1 percent in January and 5.5 percent in the last year. The category of household furnishings and supplies, which rose 1.6 percent in January and 9.3 percent over the last year, should also be leveling off.
It will also be important to monitor the rent indexes, which account for almost 32 percent of the overall CPI. Many private indexes which monitor prices in vacant units have shown considerably more rapid increases in rent than the CPI index. This has led many to expect an acceleration in the rental indexes, some of which we have already seen.
However, an important factor in the other direction is the ending of the eviction moratoriums put in place due to the pandemic. In an ordinary year, close to 1 million households are evicted. This number plunged in 2020 and 2021. While evictions are not a good thing, if we get back to a more normal pace of evictions, it will mean more vacant units will be on the market and put downward pressure on rents.
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.