The monthly Consumer Price Index (CPI) is scheduled for release by the Bureau of Labor Statistics on Wednesday, May 10 at 8:30 AM Eastern Time.
We have been seeing mixed signals on wages and inflation in recent months. The Average Hourly Wage series had been slowing sharply, but it jumped in April, and previous months were also revised higher. The annualized rate of wage growth over the last three months is 4.2 percent, which is roughly the same as the prior three months.
The Employment Cost Index for the first quarter showed compensation rising at a 4.8 percent rate in the first quarter; that is down from a peak of 5.5 percent in the first quarter of 2022 but still well above a pace that would be consistent with the Fed’s 2.0 percent inflation target. The fourth quarter figure was also revised up slightly, so it now shows a 4.5 percent annual rate of growth, compared to a 4.0 percent rate previously.
The PCE deflator showed a better picture, with the overall deflator rising just 0.1 percent in March and the core deflator rising 0.3 percent for the second consecutive month. This is obviously above the Fed’s target, but at least the downward trend is clear – core inflation was running at over a 5.0 percent rate in the first months of 2022.
Rental Inflation
Both rental indexes surprised on the low side in March, coming in at 0.5 percent for the month. They had both been running at 0.7-0.8 percent monthly rate since last summer. We knew that rental inflation would slow based on private indexes of marketed rental units, but this was a sharper fall than had generally been expected.
If the March figure was an anomaly, then we should expect some bounce back in April, with rental inflation coming in at least at 0.6 percent and quite possibly 0.7 percent to offset the low March figure. However, if the slowdown is real, then we may expect another 0.5 percent rate for rental inflation, or possibly even lower.
One item arguing for slower rental inflation is the sharp uptick in the rental vacancy rate. The Census Bureau put the rental vacancy rate at 6.4 percent in the first quarter, up from 5.8 percent in the fourth quarter. These data are erratic, but they suggest that the rental market is softening rapidly. This could mean that inflation in the sector would slow even more rapidly than predicted by the private indexes.
Food and Gas Prices
After playing a big role in driving overall inflation higher in 2021 and the first part of 2022, food and gas prices both appear to be leveling off. Store-bought food prices were flat in March, with the price of many important items actually falling. Milk prices fell by 1.0 percent last month, and egg prices were down 10.9 percent after a 6.7 percent drop in February.
Food prices are likely to again show low inflation in April. Energy prices fell 3.5 percent in March, driven by a 4.6 percent drop in gas prices. This sharp decline will not be repeated, with energy likely adding somewhat to the April inflation figure.
These non-core components are important both because they have a large effect on expectations and they have an immediate impact on people’s living standards, as they are items they purchase regularly. Lower inflation in these components is certainly good news for the overall inflation picture.
Supply Chain Items
Inventories of most items have returned to pre-pandemic levels, with cars being the major exception. However, prices of many items are still far above what we would expect with pre-inflation trends and adjusting for more rapid wage growth. This implies higher-than-normal profit margins, which may be reduced as competition pushes prices down.
We have seen some downward price movement in many areas, but we likely have more to go. The index for major appliances fell for the third consecutive month in March and is down 7.9 percent over the last year. However, the index for the broader category that includes all appliances rose by 0.7 percent and is up 1.1 percent over the last year.
Apparel prices, which were flat or trending downward before the pandemic, rose 0.3 percent in March and are up 3.3 percent over the last year. Conversely, tire prices fell 0.1 percent in March, their second consecutive monthly decline, but are still up 4.3 percent over the last year. We should expect to see prices in all of these categories flatten or fall over the course of the year.
New vehicle prices rose by 0.4 percent in March, but used vehicle prices fell by 0.9 percent. There is plenty of room for prices in both categories to fall, but it may still be several months before production is at pace to satiate demand.
Non-Core Services
Fed Chair Jerome Powell said he would be paying especially close attention to inflation in non-core services. So far, these have been relatively moderate, especially in medical care. Inflation in food and transportation services has been higher, but this has been largely driven by price jumps in the goods needed for these services (food in the case of restaurants and fuel and car parts for transportation services).
We will likely see some flip from March, where we saw deflation in medical care services and very high inflation (largely driven by airfares) in transportation services. We should expect at least modest inflation in medical services and considerably slower inflation in transportation services. It will be worth noting the price index for car insurance, which was up 1.2 percent in March and is up 15.0 percent over the last year. It will likely show considerably slower growth going forward. This component accounts for 2.6 percent of the overall CPI.
Overall Picture: Inflation Continues to Slow
The April CPI is likely to keep with the general pattern of slowing inflation. This slowdown has not been as fast or consistent as some would like, but the trend is clearly downward.
