July consumer inflation: a tale of two different trends

– by a New Deal Democrat

Consumer prices were flat in July as two very different trends offset each other. Year-over-year prices rose 8.5%, below June’s multi-decade record of 9.0%:

The two different trends are shown in the bottom bar graph of the monthly changes since the end of last year. On the one hand, energy prices (red) fell by -4.6% in July; but owner equivalent rent (gold) – which is 1/4 of the entire index – increased by 0.6%. Car prices (purple) remained unchanged, as did general inflation (blue):

The fall in energy prices in July was the steepest since 2015-16, excluding the pandemic lockdown months:

But year-over-year energy prices are still up 32.9%:

But as stated above, this was completely balanced by housing, as shown below by the year-over-year % changes in the FHFA Home Price Index (blue) versus owner-equivalent rent (red):

OER continued to accelerate on a year-over-year basis with growth of 5.8% over the past 12 months, the highest since September 1990, clearly trailing house prices with a roughly 12-month lag. Since home prices did not slow significantly in May, the last month measured in the index, it is still likely that OER has not reached its annual peak. We are likely to see the highest year-over-year increase for OER on record before this episode ends.

While vehicle prices were flat overall, the situation was slightly different for new cars, which rose 0.6% in July and are up 10.4% year-on-year, compared to used cars, which fell by – 0.4% for the month and are 6.6% on an annual basis:

Finally, as average hourly earnings for non-supervisory employees rose 0.4% in July, after rounding, real average hourly wages rose 0.3% for the month. However, real wages fell by 3.0% from December 2020:

Although energy prices have so far continued to decline in August, it is almost certain that they will not fall as much as in July. Meanwhile, OER, as mentioned above, is likely to continue to increase. So I don’t expect a sharp cooling in consumer inflation.

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