August 09, 2023
Preview: What to Look for in the July CPI
(The monthly Consumer Price Index (CPI) is scheduled for release by the Bureau of Labor Statistics on Thursday, August 10 at 8:30 AM Eastern Time.)
We have been getting lower than expected inflation reports in recent months, with both the overall and core CPI coming in at 0.2 percent in June. We may see some less good news in the July report. In particular, energy prices are likely to push the overall index higher, as gas prices edged upward in July. Food prices should again be stable, but will probably not pull down the overall CPI below its core rate. Both the core and overall rate may edge up to 0.3 percent for the month.
The Downward Path of Rental Inflation Will Continue
The surest bet in the inflation data is the continued slowing of rental inflation. We know this from both the private indexes that measure rents of marketed units, as well as the Bureau of Labor Statistics’ separate index for units that change hands. These all show sharply lower inflation, with the rate of increase falling below the pre-pandemic pace.
The lead time is roughly a year, but the exact pace is difficult to predict. The rent proper index increased 0.5 percent in June, while the owners’ equivalent rent index rose by just 0.4 percent. This is down from monthly increases in both indexes of 0.8 percent at the end of last year. The rate of slowing has been somewhat more rapid than most models suggested, which means that we may not see further slowing in July. It may not be until the end of the year that the monthly increases are down to their pre-pandemic pace of around 3.5 percent annually, or 0.3 percent a month.
Vehicle Prices Likely to Continue to Fall
New vehicle prices were flat last month, while used vehicle prices fell 0.5 percent. We know from private indexes the direction for both new and used vehicle prices is downward, but the month to month movements can be erratic. Given the known trend, it is likely that both will be negative in July. This is a big deal for the index, since together they account for more than 7.0 percent of the overall CPI and almost 9.0 percent of the core index.
Other Supply Chain Goods
Much of the jump in inflation in 2021 and 2022 was due to supply chain problems pushing up the prices of a wide range of goods, from appliances and household furniture to auto parts and clothes. These prices have since largely leveled off, but they are still much higher in many cases than would have been projected given their pre-pandemic growth path.
The Kansas City Fed just put out a paper showing that an index on supply chain pressures produced by the New York Fed leads core goods prices by six months. This index shows that supply chain pressures have fallen back sharply in recent months and are now actually below the pre-pandemic level. This should mean the prices for these goods will be close to flat or even falling in the second half of 2023. For July, we should expect the prices of these items to be flat.
Non-Housing Services
The Fed has decided that it would place particular focus on inflation in non-housing services. This category is a hodgepodge that includes items like airfares, auto repairs and insurance, restaurants and medical services. Wage growth is an important factor in these categories, but far from the only one.
Airfares are highly responsive to changes in energy prices. Restaurant prices are hugely affected by food prices, and auto repair prices reflect the price of car parts.
Inflation in this category has been held down in recent months by low inflation in medical care services. They were flat last month after falling the prior five months. Part of this likely reflects an actual slowing in healthcare inflation, but some of it is due to quirks in measurement. The good news in this category will be at least partially reversed in the second half of this year, with the medical insurance component adding to inflation instead of declining, as it had been through the first five months of 2022.
On the positive side, we may get some good news on the auto repair and especially the auto insurance components, if we see continued good news on core goods. Auto parts fell 0.1 percent in June, after being flat in May. This should help to reduce price pressure in the services category. Auto insurance is especially important here, carrying a weight of 2.6 percent in the overall CPI and 3.4 percent in the core index. The index rose 1.7 percent in June, and is up by 16.9 percent over the last year, so any slowing will go far towards dampening the CPI measure of inflation.
We may also see some improvement in inflation in restaurants, now that the big rises in food prices are behind us. Restaurant prices rose 0.4 percent in June and are up 7.7 percent year over year. The July increase may be just 0.3 percent.
Overall Picture: Continuing Progress in Slowing Inflation
Some quirks helped to keep the inflation rate (both overall and core) to just 0.2 percent in June. We may not be as lucky in July and could see a modestly higher rate of inflation in both indexes. However, we know that important components of the CPI — rent, vehicles, and non-core goods — will be showing much lower inflation in the second half of 2023. It is important to keep this trend in mind when considering the July data, recognizing that any single month will have a large erratic component.
