July consumer price index review: good and bad news for gas, housing and vehicle prices

by a New Deal Democrat

While consumer inflation in July is likely to be less intense than in recent months, I don’t see it returning to more “normal” levels. The good news is gas; the bad news is vehicles and housing.

To begin with, gas prices have fallen about 25% from their peak in late June through last weekend. To arrive at their “real” cost, I divide by the average hourly wages of unsupervised workers. Here’s what it looks like with the June 2008 peak set to 100:

In June of this year, gas prices divided by average unsupervised hourly wages were 79.8% of their peak. By the end of July, this had fallen to 73.5%. This is more typical of the 2005-07 period, and also of the 2010-14 “petrol oil collar” period, where gasoline prices fell each time they reached a threshold that threatened to trigger a consumer recession. Looks like this has happened again.

Turning to the CPI, in normal times the price of gas is the largest component of CPI volatility. And that’s likely to be the case with this Wednesday’s report as well. My rule of thumb is to take the gas price change and divide it by about 16 and add 0.15% for normal background “core” inflation to calculate the most likely monthly inflation rate. Here’s what it looked like in the 10 years before the pandemic:

Here are the last 2+ years since the pandemic began:

If these were “normal” times, gas would have lowered consumer prices in July by roughly 0.5%. Throw in “core” inflation and I’d expect a reading of -0.3% or -0.4%.

But these are not normal times, and the biggest culprit is housing inflation. Several times over the past year, I’ve done year-over-year comparisons of the FHFA and Case Shiller home price indexes against owner-equivalent rent, the official CPI measure. Instead, I’ve used monthly changes below to show how house prices have gradually caught up with owners’ equivalent rent over the past two years:

Also, let me repeat this chart from Bill McBride showing that measures of apartment rent inflation have a similar problem:

Because rents typically only increase once a year for each tenant, it takes a full year for rent increases to filter down to the aggregate.

For July, owner-equivalent rent is likely to be around +0.7%, and since it is almost 1/3 of the entire CPI, this will reduce the impact of lower gas prices.

Finally, due to issues with microchip manufacturing outside of China, vehicle prices are also a significant component of inflation, as shown in the year-over-year chart below:

But unfortunately, over the past few months, there have been no signs of a further slowdown in the monthly readings:

This suggests that increases in car prices are likely to continue.

So while I expect July inflation to pull back from its recent 1%+ monthly increase, an increase in the 0.5%-0.9% range seems likely.

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