Preview: What to Look for in the November CPI

Slower rental inflation will go far toward bringing inflation back to a more acceptable pace.

December 09, 2022

The monthly Consumer Price Index (CPI) is scheduled for release by the Bureau of Labor Statistics on Tuesday, December 13 at 8:30 a.m. Eastern Time.

The overall CPI rose by 0.4 percent in October, the same as its September increase. However, food and energy prices raised the overall rate above the core 0.3 percent core rate in October, after three months where sharply falling gas prices held down the overall rate. 

Gas prices will again show a drop in November, but the biggest questions will be with the core index. Most importantly: will the modest slowing in the rent indexes seen in October show up again in November, how much will the price declines in supply chain items lower inflation, and how much is rapid wage growth leading to inflation in core services?

Is Rental Inflation Slowing Yet?

Private indexes of the rents of marketed units all show that the rate of inflation slowed sharply in the summer, and some are actually showing deflation. Research from the Bureau of Labor Statistics shows that the CPI rent indexes lag these private indexes by six months to a year.

Monthly rental inflation peaked at 0.8 percent in both CPI indexes in September, but then slowed to 0.7 percent in the rent proper index and to 0.6 percent in the owners’ equivalent rent (OER) index in October. (The slowing in monthly rental inflation in the rent proper index was actually 0.15 percentage points, compared to 0.19 percentage points in the OER index.)

If we see comparable slowing again in November, it will be a huge factor in holding down the core inflation rate. The two rental indexes account for more than 31 percent of the overall CPI and almost 40 percent of the core index. The rapid rise in rents early this year was a big factor driving inflation higher. Slower rental inflation will go far toward bringing inflation back to a more acceptable pace.

Price Declines in Supply Chain Items

Much of the jump in the inflation rate in 2021 and 2022 was due to items that ordinarily see little rise in prices, or even see price declines. These items, like apparel, appliances, and household furniture, all saw rapid price increases in 2021 and the first half of 2022, as retailers were unable to meet demand due to supply chain problems.

Now that retailers have managed to restock, and even overstock, their inventories, the prices of many of these items are now falling again. Apparel prices fell 0.7 percent in October, their second consecutive decline, but the index is still up 4.1 percent from its year-ago level. The index for appliances fell 0.5 percent in October, the fourth consecutive decline. The index is only 0.5 percent above its year-ago level, but still 12.7 percent higher than its pre-pandemic level. Furniture prices fell 1.2 percent in November, but are still 21.4 percent higher than their pre-pandemic level.

The prices of all these items still have substantial room left to fall. The pace may have accelerated somewhat in November, as retailers look to unload excess inventory in the holiday shopping season. A large portion of the goods in these categories are imported, and nonfuel import prices have been falling since April, so these price declines should be showing up in consumer prices.

New and Used Vehicles

The price of both new and used vehicles rose sharply in the pandemic, as a fire in a Japanese factory led to a worldwide shortage of semiconductors, which seriously impeded auto production, in addition to pandemic-related factors. With production now back close to normal, supply is getting closer in balance with demand. Used vehicle prices have fallen for the last four months, but the index is still 2.0 percent above the year-ago level and 47.0 percent above its pre-pandemic level.

New vehicle prices are still rising, with the October CPI showing an increase in the index of 0.5 percent. The index is now 19.2 above its pre-pandemic level. It is likely that this index will soon start to turn downward, possibly with the November report. It is worth noting that the import price index for vehicles and parts fell in two of the last three months, although it rose 0.6 percent in October. This index has risen by just 6.4 percent since the start of the pandemic.

Core Non-Rent Services

There has been an increased focus on this category of the CPI, since it is most directly related to wage growth. The story here is not as bad as is often thought. For example, the medical services component rose 5.4 percent over the last year, but this was driven largely by a 20.4 percent jump in the health insurance component, which accounts for 14.2 percent of the medical services index.

The insurance component is measuring the profits and administrative costs of insurers, not the cost of medical services. These have been rising at a far more moderate pace. The index for professional medical services has risen by 3.3 percent over the last year, while the index for hospital and related services has risen by 3.4 percent. The former is roughly a percentage point above the pre-pandemic inflation rate, while the latter is roughly the same as the pre-pandemic average.

Inflation in some other service areas mixes supply chain issues with rising labor costs. For example, the index for car repairs has risen by 10.3 percent over the last year and by 0.7 percent in October. While the sector is undoubtedly seeing higher labor costs, the rapid increase in the price of car parts is a big part of this story. If that is right, then we should see inflation in the sector slow as more supply chain issues are mitigated.

Productivity Growth

After showing record declines in the first half of 2022, productivity grew at a moderate 0.8 percent rate in the third quarter and seems on track to show a better pace in the current quarter. While productivity measures are highly inaccurate, there can be little doubt that the numbers for the first half of this year were bad, which implied real cost pressures for businesses.

With productivity back on a positive growth path, these pressures will be alleviated. This should be a factor leading to slower inflation in November and in the months ahead.

Slower Inflation, but the Problem is Still There

The basic story is that we should see an improving inflation picture in most areas. The monthly rate for the core index is likely to still be too high to be consistent with the Fed’s target, but is likely moving in the right direction.

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