By Paul Gomme and Peter Rupert
Consumer Price Index
The BLS announced that the Consumer Price Index for all urban consumers (CPI-U) rose 0.1% in May on a seasonally adjusted basis. This 0.1% rise translates into an annualized 1.5%, well below the Fed’s 2% inflation target (the grey line in the figure below). Over the last 12 months it rose 4.13%. The preferred measure of Econsnapshot is a measure of inflation based on a 3 month interval. We prefer this measure because the year-over-year number moves very slowly while the month to month number is very volatile as seen in the graph below. This 3 month inflation rate grew at an annual rate of 2.2%, just above the Fed’s 2% target.
The bad news from the CPI report is that core CPI inflation — which strips out the more volatile food and energy prices — continues to run at 5% or more, much higher than the Fed’s target. Indeed, energy prices have declined significantly, down almost 12% year over year. When looking at core CPI over the last month it is the shelter component that was the largest contributor to the rise in prices, accounting for about 60% of the overall increase. One reason to look at core CPI inflation is that it may be a better measure of trend inflation than headline CPI. If so, the Fed still has work to do to bring inflation back to target.
Of course, Fed watchers know that the Fed focuses on inflation as measured by the personal consumption expenditure (PCE) price index. Over long periods of time, PCE and CPI inflation generally move together. That said, on average PCE inflation runs below both the CPI and core CPI. The PCE for May won’t be released until June 30. Consequently, the recent CPI inflation rates may provide useful information regarding the direction for PCE inflation.
Producer Price Index
Hard on the heels of the CPI report came that for the Producer Price Index (PPI). Inflation as measured by the PPI has been trending down since early 2022. Indeed, at an annual rate, the monthly and 3 month inflation rates are negative meaning that the price index has recently been falling.
Roughly speaking, the CPI reflects prices paid by the typical urban household while the PPI captures prices received by domestic producers of goods and services. Since the PPI captures prices received by domestic producers while the CPI measures prices paid by consumers, it’s tempting to conjecture that changes in the PPI will eventually be reflected in the CPI. However, there are differences in coverage which mean that this logic does not necessarily hold. For example, since the PPI measures prices received by US producers, it does not include prices of imports; the CPI does. Also, nearly 1/4 of the CPI includes the imputed rent of owner-occupied housing; this imputed rent is not included in the PPI. Finally, only some of the goods and services covered by the PPI represent purchases by consumers; the remainder are goods and services used by other producers, capital investment, exports and government. The Bureau of Economic Activity says that the PPI for Personal Consumption comes closest to the coverage of the CPI. Yet, the chart below shows that inflation as measured by this last measure is much more volatile than the CPI. The chart also shows that there is no obvious tendency for PPI inflation to lead CPI inflation.
Automotive Prices
Since the onset of the pandemic, much has been said and written about supply chain problems, with the automotive sector receiving particular attention, such as this article that makes several blunders and left out some important economics as well. Anyone who has tried to buy a new car knows that there are very long delivery lags, especially for electric vehicles. These issues in the new car market has spilled over into the used car market where prices have also risen. Keep in mind that a one time increase in the price of, say, new cars is not what we typically mean by `inflation’. To be sure, such a one time increase will, for a time, lead to an increase in measured inflation. However, this effect will dissipate with time. The chart below is based on price indices from the CPI. The used car inflation rate was much higher than that of new cars from mid-2020 to mid-2022. Recently, used car prices have been falling, and new car price inflation is moderating. Automotive maintenance and repair price inflation continues to increase.
Finally, turn again to the difference between the PPI and other price indices. From the PPI, prices received by domestic automotive producers grew rapidly through 2021 and 2022, with an inflation rate as high as 30%. While those prices have started to decline, the price level has risen 28.5% since May 2020. Granted, automotive inflation as measured by either the CPI or PCE price index also rose, but not nearly as much as recorded by the PPI, and the recent decline in PPI automotive prices has translated into a slowing of these prices as measured by the CPI and PCE.
The June 13-14 meeting of the Fed revealed a pause in rate hikes. As the graphs above show, there are certainly signs that the Fed’s early moves have worked in their favor. As we remarked above, given the core CPI numbers there still may be more work to do…and the Fed made it clear in the statement that more rate hikes are likely.
