Consumer inflation remains dominated by gas (good) and housing (bad) prices

– by a New Deal Democrat

Lower gas prices continue to do great things for the economy. In December, they fell from roughly $3.50 to $3.10/gallon. Meanwhile, the phantom threat of landlord equivalent rent continues to drag “core” inflation up. Details below.

Headline inflation: 0.1% month-on-month, +6.4% year-on-year (12 months+ low), +0.9% since June, 1.8% annual rate

Core +0.3%, +5.7% (12-month low), +2.2% from June, 4.4% annual rate

Energy -4.5%, +7.0%, -15.1% since June (right scale of chart below)

All items with reduced energy: +0.3%, +6.4%, +2.5% since June, +5.1% annual rate

It’s important to note that despite all the hype about how inflation has eased since June, the former energy (gold in the chart above) has hardly budged.

Food +0.3% month-on-month, +10.4% year-on-year (vs. August 2022 +11.4% 40-year high)

New vehicles -0.1% month-on-month, +5.9% year-on-year (in real terms adjusted for wages up 7% from April 2020 vs. September +8.4% peak)

Used vehicles -2.5%, -8.8% (in real terms adjusted for wage increase +22% from April 2020 vs January 2022 +45% peak)

Shelter +0.8% m/m (25-year m/m high), +7.5% y-o-y (40-year y-o-y growth)

As I’ve been shouting from the rooftops since November 2021, the fictitious “Owner Equivalent Rent” is dragging this metric – and core inflation with it – up. As shown in the updated chart above, OER lags actual home prices (in red) by 12 months or more. House prices are now firmly on the downside, with year-on-year comparisons falling sharply. But the CPI for shelter is likely to rise for at least a few more months before turning around.

While I claim to have no special fortune-telling skills, I suspect that oil prices have bottomed out for a while, and so the subsequent virtuous decline in gasoline prices is coming to an end:

In short, I don’t expect the streak of excellent CPI reports to continue.

So I expect “core” CPI to continue at an increased rate for the next few months. So far, despite paying lip service to the fact that OER is a highly lagging way to influence monetary policy, the Fed seems intent on continuing to hit the economy with rate hikes, albeit at a slower pace.

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