CPI preview

 

– by a New Deal Democrat

No economic news today. August CPI will be reported tomorrow. We remind you that there was no inflation in July. In August last year, prices rose 0.3%, so any number lower than that would take the CPI down year-on-year from its July level of 8.5% (June inflation of 9.0% on year-on-year was the peak).

The big issues for consumer inflation are housing, vehicles and gasoline. So let’s take a look at each.
Yesterday, for the first time, Prof. Paul Krugman admitted something I’ve been banging on about for nearly a year:

I.e. the official measure of inflation that guides the Fed’s policy has lagged far behind the real world — by 12 to 18 months, according to my best estimates.
Krugman made this observation, noting that monthly apartment rents, according to Apartments.com, may be peaking:

The official CPI measurement of rents includes this for *all* apartments. But since leases typically run for one year, the leading portion of rents is for those apartments whose leases are up for renewal this month.
The best measure I found is from ApartmentList. Here is their cumulative and annual measure as reported by realtor.com:

Note that according to my rule of thumb, these measures peak approximately when their annual growth rate slows by 50%, rents have not yet peaked.
A better view is their monthly rate of change measure:

Note that prior to the pandemic, the typical seasonal pattern was that the largest increases were in the spring, with decreases in the last 4 months of the year. Last month’s increase was significantly more than August increases in 2018, 2019 and 2020.
In contrast, here are the FHFA and Case Shiller home price indexes, measured on an annualized basis over the same time period:

House prices started to accelerate on an annual basis long before apartment prices. Both condo and house prices *may* have hit year-over-year highs at the same time last March. But there is insufficient history of comparative data to make further statements with confidence.
With rent CPI measurements lagging, we are likely to see continued significant increases tomorrow.
Although there is little information about new vehicles, Wolf Street had a good article for used car prices using data from car auctions in Mannheim. Here is his graph of the prices paid:

Note that the peak prices were 7 months ago.
Here is the year-over-year chart:

The annual peak was 9 months ago.
Here’s the CPI for used vehicles, both absolute (blue) and annualized (red, right scale):

This CPI measure seems to track the Mannheim data quite well. With prices down around 5% in August, for Mannheim, I’m looking for a similar drop in used vehicle prices in tomorrow’s CPI.
Finally, here’s the monthly change in gas prices from the EIA (blue), /16 to scale and add .15%, which is the long-term average of the monthly growth in “core” cpi compared to overall CPI:

Gas prices fell even more in August than in July.
So we are likely to see continued upward pressure on CPI from house prices tomorrow, offset by softening used car prices and falling energy prices. Add that in and it wouldn’t be at all surprising to see an actual *decline* in CPI for August, which needless to say would reduce year-on-year CPI growth to around 8%.
That, unfortunately, won’t be enough to stop the Fed from another big rate hike later this month.


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