U.S. Economic Brief || Headline CPI inflation moderates, no let up on core

Headline CPI inflation moderates, no let up on core

*April’s hotter than expected CPI print will do little to assuage the Fed’s concerns over inflation that FOMC members have described as “much too high”, and likely reinforces the probability of 50bp rate increases at the June and July FOMC meetings. While headline inflation pressures eased, rising 0.3% m/m and 8.3% yr/yr, a step down from the 8.5% yr/yr increase in March, core inflation (excluding food and energy) accelerated, rising 0.6% m/m (Chart 1).

*The moderation in m/m headline inflation partially reflects a decline in energy commodity and gasoline prices, while the declining yr/yr headline and core inflation measures is largely due to base effects from last spring. Looking ahead, members of the FOMC have indicated it is the sequential trend in m/m inflation prints that they will be monitoring for signs that inflationary pressures are easing.

*While used vehicle and some durable goods prices are beginning to retrace their pandemic gains, core services price increases are gathering momentum, rising at a 7.7% three-month annualized pace in April (Chart 2). The pickup in services inflation has been broad based, propelled by a mix of mounting inflationary pressures in the CPI’s shelter and healthcare components paired with a “reopening effect” that is shifting the composition of demand back towards services and away from goods. Prices of food away from home increased 7.2% yr/yr, while prices of lodging away from home (which includes hotels and motels) increased 2% m/m and 23% yr/yr (Chart 3), and further price increases are likely as the effects of the pandemic fade and consumers return to dining out and traveling.

*Shelter costs which comprise approximately one-third of the headline CPI basket and 40% of core CPI reaccelerated in April, rising 6.4% on a three-month annualized basis driven by an acceleration in the rent and OER (owners’ equivalent rent) components which increased 0.6% and 0.5% m/m, respectively. Measures of rent in the CPI tend to lag changes in market rents and home prices by 12 - 16 months, so that even if the pace of home price appreciation and market rents cool, shelter inflation in the CPI is likely to accelerate and remain elevated through year-end 2022 (Chart 4).

*Healthcare costs have lagged price increases in other sectors, but have increased markedly over the last three months, rising at a 5.3% three-month annualized pace. Increases in material, equipment, and labor costs paired with resurgent demand as the public health situation improves and postponed medical procedures and visits are rescheduled could exert further upward pressure on prices.

*Energy commodity prices declined 5.4% m/m on a seasonally adjusted basis driven by a 6.1% fall in gasoline prices as average retail gasoline prices gave up some of their March gains in April, weighing on the m/m increase in headline CPI in April. However, gasoline prices have surged in recent weeks, with average retail gasoline prices increasing to a record $4.4 /gallon on May 10 (Chart 5). This jump in gasoline prices is likely to boost energy inflation and the m/m gain in headline CPI in May, with domestic refining capacity constraints and low inventories likely to keep gasoline prices elevated. Reflecting the increase in fuel costs, airfares have surged in the last two months, increasing 10.7% and 18.6% m/m in March and April, contributing 0.1pp to April’s m/m increase in headline inflation.

*Vehicle prices, a key component of the “transitory” inflation argument bandied about by the Fed in mid-2021 were mixed in April. Used vehicle prices declined 0.4% m/m, a much slower pace than the 3.8% fall in March, while new vehicle prices jumped 1.1% m/m, so that on net, vehicle prices added to m/m headline and core inflation (Chart 6). While we continue to expect used vehicle prices to recede through 2022, if April’s trend of relatively modest used vehicle price declines is sustained, then vehicle price declines are likely to provide relatively little relief to m/m core inflation prints, particularly as services prices accelerate.

*Price increases continue to outpace nominal wage growth, contributing to a further, albeit modest, decline in real average hourly earnings, although average hourly earnings for production and nonsupervisory employees ticked up modestly (Chart 7). With headline inflation likely to reaccelerate in May as energy prices rise again, nominal wages may again fail to keep up with inflation. While household balance sheets remain healthy on aggregate, sustained declines in real average hourly earnings are likely to continue to impinge on real disposable income.

Chart 1. Headline and Core (ex. Food and Energy) CPI (yr/yr, %)

Chart 2. Core Services (ex. Energy) Inflation (3-month annualized, %)

Chart 3. CPI – Lodging Away from Home and Food Away from Home (yr/yr, %)

Chart 4. Owners’ Equivalent Rent and Rent (3-month annualized, %)

Chart 5. CPI Gasoline (m/m, %) and AAA Retail Regular Gasoline Price ($/gallon)

Chart 6. CPI – Used Cars and Trucks (m/m, %)

Chart 7. Real Average Hourly Earnings

Mickey Levy, [email protected]

Mahmoud Abu Ghzalah, [email protected]

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