June 07, 2022
(The monthly Consumer Price Index (CPI) is scheduled for release by the Bureau of Labor Statistics on Friday, June 10 at 8:30 AM Eastern Time.)
We are likely to see a very mixed picture in the May CPI. The overall CPI will likely show another large jump, driven by higher energy prices. However, we expect to see more evidence of core inflation moderating as more of the price increases from earlier in the recovery are reversed.
The bad news on energy is baked in the cake. After falling sharply in April, gas prices turned around and hit new highs in May. The story continues to be soaring oil prices driven by the war in Ukraine.
There is likely a large speculative element to the rise in world oil prices. Relatively little oil has actually been withdrawn from world markets to date. The oil that is not being bought by the United States and Europe is largely going to India, China, and other markets. These countries, in turn, are buying less from Saudi Arabia and other producers, freeing up oil for the countries sanctioning Russia. If speculation is a major factor in the recent rise in world oil prices, then an end to the fighting could have a reverse effect on prices, even if sanctions remain in place.
Food prices are likely to show a substantial increase, although less than in prior months. Food has been rising at a rate of close to 1.0 percent a month. Many of the shipping-related problems have been resolved, so there should be fewer price increases for this reason. However, war-related increases in world prices for many food products has not reversed.
The picture for core inflation should show some improvement. The shipping backlog from earlier in the recovery has been hugely reduced, and non-auto inventories are at healthy levels, although COVID-19-related shutdowns in China are still leading to shortages of many items.
There is a wide range of items that had generally shown little inflation, or even falling prices, which saw rapid price increases during the recovery from the pandemic. This list would include apparel, which saw prices rise 5.4 percent over the last year. The price of appliances rose 7.8 percent, and the price of furniture and bedding rose 15.0 percent.
Major retailers are now reporting gluts of these sorts of products. This should mean downward pressure on prices. At the very least, they should be close to flat in May, with the possibility of price declines for many products.
After showing low inflation throughout the recovery, the price of medical services has risen rapidly in the last two months, going up 0.6 percent in March, and 0.5 percent in May. While the price of many services is rising more rapidly than earlier in the recovery, the biggest factor in this rise has been the price of medical insurance, which has gone up by more than 2.0 percent a month this year.
It is likely that this increase will be slowed and maybe partially reversed, lowering the rate of inflation in medical services. It is important to remember that the health insurance component only refers to administrative costs and profits of insurers, not premiums.
Car insurance prices have also been rising rapidly, going up an average of 0.9 percent over the last three months. This item, which accounts for 3.0 percent of the core inflation index, had fallen sharply in the downturn as insurers lowered rates to reflect less driving and fewer accidents. It has now reversed these declines and is around 2.0 percent above the pre-pandemic level. This should mean future price rises will be more moderate.
New vehicle prices, which have risen 13.2 percent over the last year and by 1.1 percent in April, are likely to show a smaller increase in May, if not an actual decline. The production problems from the semiconductor shortage are still there, but it seems most producers are getting closer to normal production schedules. And, higher interest rates have curbed demand to some extent.
Used car prices, which rose 22.7 percent in the last year, are likely to show some decline in May. The shortage that sent prices spiraling is coming to an end.
The sharp rise in mortgage interest rates following the Fed’s rate hikes has put a big dent in the home sales market. This probably will not have much impact on the rental market for at least another month or two.
The logic here is that people who might have bought a larger home, or a second house, will be discouraged by higher mortgage rates, leaving more space for others, and downward pressure on rents. The easing of supply chain problems should allow for a more rapid rate of home completions, which had been running at just a 1.3 million annual rate, compared to a 1.8 million rate for starts. This will also put downward pressure on rents.
On the whole, this should be a positive report. With wage growth slowing and supply chain problems easing, we are not seeing the wage-price spiral of the 1970s. But the war-related price increases for food and energy will still be bad news for the overall inflation picture and US consumers.
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.