July 10, 2023
(The monthly Consumer Price Index (CPI) is scheduled for release by the Bureau of Labor Statistics on Tuesday, June 12 at 8:30 AM Eastern Time.)
Inflation is likely to continue on its downward course in June. The core CPI, which came in at 0.4 percent in May for the third consecutive month, should edge downward to 0.3 percent in June. The overall CPI may edge up slightly from its 0.1 percent May rate, since we won’t see another sharp decline in gas prices, like the 5.6 percent drop last month. However, another decline in food prices should still keep the overall rate somewhat below the core rate.
Rental Inflation Will Continue to Slow
The rent indexes (rent and owners equivalent rent) are slowing as the CPI catches up with indexes of marketed units that change hands. These indices have been showing sharply lower rental inflation since the end of last summer. This slowdown is showing up in the CPI indexes. They had been showing monthly increases of 0.8 percent at the end of 2022. The monthly rises have been close to 0.5 percent in the last three months. This may slow to 0.4 percent in June.
The indexes of marketed units show the rate of inflation slowing to less than the pre-pandemic rate. This means that we should expect to see additional slowing in the CPI, with the annual rate likely to be under 3.0 percent by the end of the year. With these indexes accounting for almost 40 percent of the core CPI, slower rental inflation has a huge impact.
New and Used Vehicles
There was probably no segment of the economy hit harder with supply chain problems than cars and trucks. In addition to the pandemic disruptions that hit every sector, a fire at a semiconductor factory in Japan created a worldwide shortage of computer chips.
We now seem to be largely through these problems. Dealers have rebuilt their inventories, and, according to accounts in the business press, they now feel the need to offer discounts to attract buyers. New vehicle prices fell 0.1 percent in May after dropping 0.2 percent in April. Used car prices rose 4.4 percent in both months.
It is likely we will see declines in both new and used vehicles in June. These categories account for a bit less than 9.0 percent of the core index, so if both indexes are negative in June, it will seriously dampen the inflation rate reported for the month.
Medical Services
The index for medical services has fallen for five consecutive months. This has been driven largely by a big decline in the index for health insurance, which follows rapid increases in 2021 and the first half of 2022. This is due to the peculiar way the CPI calculates inflation in health insurance rather than an actual pattern in insurance pricing. It measures the gap between premiums and what the insurer pays out for services.
In any case, the decline in the insurance index will not continue, but inflation in the other components of medical care has been reasonably well contained. If that continues, then medical services may not add much to inflation even when the insurance index stops falling.
Auto Insurance
While it has gotten little attention, the index for auto insurance has been soaring. It rose 2.0 percent in May and is up 17.1 percent over the last year. This component accounts for more than 3.0 percent of the core CPI. It added more than 0.5 percentage points to core inflation in the last twelve months.
The CPI auto insurance component measures gross premiums, in contrast to the PCE measure which just looks at net premiums – the difference between what insurers get in premiums and what they pay out in claims. The sharp rise in the CPI measure could be due to insurers paying out more money for car repairs and passing that on in premiums. If that is the case, the rate of inflation in the index should slow as repair costs rise less rapidly.
Inflation Still High, but Coming Down
We are likely to see an overall inflation rate that is very moderate, but a core rate that is falling – but still well above the Fed’s target. The continuing decline in rental inflation, which we can be certain of based on private indexes of marketed units, virtually ensures that the core rate will continue to drop through the rest of the year. The normalizing of the car market, and the resulting decline in car prices, will also help to lower core inflation. We are likely to see lower inflation or actual price declines in other supply chain items, like household furniture, car parts, and clothes.
These factors point to lower core inflation. However, there is a risk that core services will go in the other direction. Thus far, inflation in medical care services, the largest service component after shelter, has remained modest, but this could change. One worrying factor is that the rate of wage growth is above a pace that would be consistent with the Fed’s 2.0 percent target. This could push service sector prices higher.
On the plus side, the drop in food prices, holding down the overall CPI, means that real wages are rising. The increase in real wages for June is likely to be around 0.2 percent. This would be the fourth consecutive month of real wage growth.
