May 13, 2024
(The Consumer Price Index is scheduled for release by the Bureau of Labor Statistics on Wednesday, May 15 at 8:30 AM Eastern Time.)
The overall and core Consumer Price Index (CPI) both increased by 0.4 percent in March as the path towards slower inflation has, at least temporarily, stalled. The increase in the overall CPI was caused by a 1.1 percent rise in energy prices, which went along with a modest 0.1 percent rise in food prices.
The core index rose 0.4 percent for the third consecutive month. It is being held up in part by rent indexes, both of which rose 0.4 percent in March, but also by a jump of 1.5 percent in the index for transportation services and a 0.6 percent rise in the index for medical care services.
We will likely see an increase of 0.4 percent again in the April CPI as gas prices continued to rise through the month. The core index may slow modestly, as the extraordinary factors that boosted it in March, most notably a 2.6 percent rise in the auto insurance index, are unlikely to be repeated.
Slowing Rental Inflation
The pandemic surge in rents in 2021–2022 continues to be felt in the CPI. Most renters do not move in any given month. Instead, their rents are locked in by long-term leases. The indexes which do measure rents in units that change hands have been showing stable or even declining rents for a year or more.
This includes the BLS New Tenant Rent Index, which captures the change in rents in units that have changed hands. This index is up just 0.4 percent from its year-ago. Perhaps more importantly, it is now 3.0 percent below the All Tenant Regressed Rent Index.
Before the pandemic these indexes had tracked each other closely. The New Tenants Iindex jumped ahead with the surge in rents at the start of the pandemic. With it now trailing the All Tenants Regressed Rent Iindex, not only in rates of change but in levels, we should be seeing the CPI rent indexes leveling off, with the rate of rental inflation likely falling below its pre-recession pace. However, the timing remains difficult to predict.
Before the pandemic these indexes had tracked each other closely. The New Tenants Index jumped ahead with the surge in rents at the start of the pandemic. With it now trailing the All Tenants Regressed Rent Index, not only in rates of change but in levels, we should be seeing the CPI rent indexes leveling off, with the rate of rental inflation likely falling below its pre-recession pace. However, the timing remains difficult to predict.
Continuing Declines in New and Used Vehicle Prices
The prices of new and used vehicles are heading downward, reversing much of the supply-chain driven runup in the pandemic. In March, new vehicle prices fell 0.1 percent, while used vehicle prices dropped 2.2 percent. Over the last year, new vehicle prices are up 0.2 percent, while used vehicle prices are down 1.8 percent.
There is reason to believe they have much further to fall. The CPI new vehicles index has risen 20.6 percent since the start of the pandemic, while the used vehicle index rose 30.2 percent. By comparison, the Producer Price Index (PPI) for vehicles rose 9.9 percent, while the index for imported vehicles has risen just 9.2 percent. Prior to the pandemic, the new vehicle index had been rising less rapidly than the PPI index and used vehicle index had been trending downward since 2014.
Food Prices Likely to be Close to Flat
Food prices have leveled off over the last year, rising just 1.2 percent year-over-year. There are still erratic movements in specific items, for example chicken prices jumped 1.8 percent in March, but overall food inflation seems to be largely under control.
Nonetheless, food prices are still more than 25.0 percent above their pre-pandemic level, slightly outpacing wage growth over the last four years. With the price of underlying commodities like wheat and corn showing no clear trend, wage growth will likely outpace food prices for the rest of the year.
Apparel Prices Likely to Drop
Before the pandemic apparel prices generally trended downward. They rose sharply during the pandemic but have largely leveled off now that supply-chain issues have been resolved. Nonetheless, they rose 0.6 percent in February and 0.7 percent in March. This is likely an issue of seasonal adjustments. These increases are likely to be at least partially reversed in April.
Medical Care Services Likely to Show 0.3–0.4 Inflation in April
Medical care services had been a problem area for decades, but inflation in this category slowed sharply during the pandemic. It has reaccelerated some with the ending of the pandemic, but inflation has mostly remained contained.
For the category as a whole, the index is up just 2.1 percent over the last year, although it rose 0.6 percent in March. This was driven largely by a 1.2 percent jump in the insurance index. The professional medical services index was flat in March, but the hospital and related services index rose by 1.2 percent.
One encouraging sign here is that inflation in the medical care components of the Producer Price Index (PPI) seems reasonably well-contained. The PPI for physicians’ services has risen just 1.2 percent over the last year and was flat for the last two months.
Inflation in Auto Insurance Likely to Slow
The index for auto insurance rose 2.6 percent in March, accounting for 0.07 percentage points of the March rise in the overall CPI and 0.09 percentage points of the rise in the core index. The index has risen by 22.2 percent over the last year.
As noted before, this rise is driven overwhelmingly by higher payouts due to more damage in accidents and other claims. The auto insurance index in the Personal Consumption Expenditure deflator, which is a net measure that excludes claims, has been rising in the mid-single digits. In years prior to the pandemic, there were long periods where the auto insurance index rose rapidly, followed by periods where it trailed the overall CPI. That reversal may not happen any time soon, but it would substantially improve the CPI inflation picture if it did.
Wages, Productivity, and Inflation
The April wage data indicated that wage growth over the last three months has slowed to roughly its pre-pandemic pace. Productivity growth for the first quarter was a disappointing 0.3 percent, but the rate over the last year was still 2.9 percent, well above the pre-pandemic average. The data to date for the second quarter indicate that we will have strong growth this quarter, which would translate into another good productivity figure.
That would support the case for inflation slowing further. It is worth noting, excluding shelter, CPI inflation was just 2.3 percent over the last year.
The April CPI data will also provide some insight into the extent to which consumers’ views of the economy are being driven by the media or what they see in the world. The reporting on inflation has been very negative in recent months. The Michigan Survey of Consumer Sentiments took a sharp shift downward in the latest reading, with people now expecting considerably more inflation. The April CPI should give us insight as to whether this change in expectations has any basis in the prices people actually see.
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