November 08, 2022
(The monthly Consumer Price Index (CPI) is scheduled for release by the Bureau of Labor Statistics on Thursday, November 10th at 8:30 AM Eastern Time.)
After two months where the overall CPI was nearly flat, it rose by 0.4 percent in the September CPI. While gas prices continued to fall, the drop in the energy index was less than half as large in the prior two months. Food prices continued to rise rapidly, largely offsetting the drop in the energy index and core inflation was 0.6 percent, the same as in August. We are likely to again see a high overall and core rate in October, although there may be some good news in the non-shelter core components.
Will Prices Drop for Supply Chain Items?
Perhaps the most important question in the October report is whether we will see more of a turnaround in the items whose prices rose sharply in the pandemic recovery due to supply chain problems. New vehicles are the most important single item on this list. Vehicle prices have soared due to the semiconductor shortage created by the fire at a major factory in Japan.
Chips seem more plentiful now, and production is close to pre-pandemic levels by many measures. However, manufacturers have a backlog of orders which is holding up demand. On the other side, higher interest rates are likely to impede new purchases.
New vehicle prices rose 0.7 percent in September and were up 9.4 percent over the last year. This added almost 0.4 percentage points to the overall inflation rate and almost 0.5 percentage points to the core. It is possible we will finally see the beginning of the turnaround in October, but this may just mean a leveling off of price rises, rather than actual declines, which will only come later, likely in 2023.
The prices of used vehicles have turned around, dropping 1.1 percent in September, the third consecutive month of decline. However, the index is still up 7.2 percent over the last year and more than 50 percent since the start of the pandemic. (Prices had been flat or trending slightly downward before the pandemic.) This decline will likely continue in October.
Other Supply Chain Items
There is a wide range of other goods, such as apparel, household furniture, and appliances, that had sharp price rises in the pandemic recession. Prices for these items had typically been flat or trending downward before the pandemic.
Inventories have largely been restocked in recent months; a large percentage of these goods are imported. The price of non-fuel imports has been falling sharply in recent months. Also, shipping costs have fallen more than 70 percent from their pandemic peaks. This should mean that we will be seeing price declines in these goods for the rest of this year and into 2023, as the pandemic-related price rises get reversed.
Apparel prices fell 0.3 percent in September, but are still up 5.5 percent over the last year. Furniture prices fell -0.1 percent in September. They are still up 10.0 percent for the last year. Appliance prices fell 0.3 percent in September, but are up 13.5 percent since the start of the pandemic. It is likely they will fall further in October.
Rent
The rent proper index and the owners’ equivalent rent index both rose 0.8 percent last month after rising 0.7 percent in August. Over the last year, they are up 7.2 percent and 6.7 percent, respectively. These indices account for more than 31 percent of the overall CPI and almost 40 percent of the core index.
Private indexes that measure the rents of marketed units have been showing declines in recent months. We know that the CPI lags these indexes by up to a year, so we will not be picking up the current situation in the rental market any time soon, but we may see somewhat lower inflation in October.
Health Care Insurance
The health care insurance index has been rising sharply, going up by more than 2.0 percent in eight of the last nine months. It is up by 28.2 percent over the last year, adding almost 0.3 percentage points to the overall inflation rate.
It is possible that it will turn in October with the start of the new fiscal year. The index measures the gap between payments to insurers and what the insurers pay for medical care. There are some adjustments to Medicare and Medicaid payments that may lower this gap.
Other Medical Services
Inflation in other medical services has actually been relatively modest. While the index for professional medical services rose 0.6 percent in August and 0.7 percent in September, this was after being flat in July. Over the year, they have risen by just 3.3 percent. Hospital and related services have risen by 3.9 percent over the last year. Moderation in these categories will be an important part of the non-rent services index.
Food
Food prices have risen by 11.2 percent over the last year. This is a worldwide phenomenon, with higher prices driven by higher shipping costs, Ukraine war-related shortages, and global warming-related weather conditions. The prices of many commodities have been falling in recent months, as is the case with shipping costs. This could mean a somewhat slower pace of price increases in store-bought food, which rose 0.7 percent in each of the last two months.
Prices for restaurant food have actually trailed prices for store-bought food for most of the last year, reversing the normal pattern where restaurant prices go up roughly a percentage point more rapidly. This changed in the last two months when restaurant prices rose 0.9 percent. The culprit was a huge increase in prices for school meals, which rose 19.3 percent and 44.9 percent, respectively, due to a scaleback of government subsidies. Increases in restaurant prices will likely slow sharply in October.
Waiting for the Turning Point
We have had several months of very bad core inflation data. There is evidence of falling inflation in many areas of the economy. Perhaps we will see some evidence in the October CPI.
