Headline Inflation Drops but Housing Prices Keep Core Rate High
Peter Bernstein, Chief Economist, pbernstein@rcfecon.com, 312-431-1540 x1515
The Current Situation
The CPI increased 0.2% in June 2023, bringing down the year-over-year inflation rate to 3.0%, the lowest reading in over two years. Excluding food and energy prices, core CPI also rose 0.2% in June, yielding a year-over-year inflation rate of 4.8%. That’s the lowest rate of core inflation since October 2021 but still well above the Fed’s target of 2.0%. Nevertheless, recent data clearly show a persistent decline in inflation. In the three months ending in June, annualized headline inflation was 2.7% and annualized core inflation was 4.1%, both below their year-over-year levels.
A recurring theme has been the impact of rents and homeowner’s equivalent rent (OER). These prices were up 8.3% and 7.8%, respectively, versus a year ago. Excluding these shelter prices, the CPI in June was only 0.7% higher than it was in June 2022. Core inflation excluding shelter was just 2.7%.
In other words, price increases are concentrated in one sector of the economy, a situation that contradicts the notion that inflation represents a persistent rise in the general price level. Add the fact that the CPI measure of rents (and OER which is derived from rents) probably overstates recent inflation. Zillow’s measure of rents is up just 4.1% in June, half the CPI rent inflation measure.
The impact of just two, albeit substantial, parts of the CPI on the measured rate of inflation is why it is important to look at the individual components of the index to fully understand the differing price trends in the economy today. Our Scorecard does exactly that.
RCF’s Inflation Scorecard
RCF’s Inflation Scorecard is based on analysis of 20 different price series comprising 98% of the total consumer price index. Each of these price series represents a portion of the CPI based on household spending patterns. For example, food purchased for at-home consumption is about 8.7% of the typical consumer’s budget; it has a weight of 8.73 out of a total index of 100.
Our scorecard presents two metrics to track month-to-month price increases. The first metric is the share of the index for which inflation in the most recent month is rising (greater than the prior month’s inflation) vs. the share of the index for which inflation is falling (lower than the prior month) or prices fell (deflation). Because deflation is showing up across more categories, we’ve added a separate measure of the total weight of deflation within the CPI index.
Our second metric is the share of the index for which the most recent month’s inflation exceeded 0.2%, a monthly rate that corresponds to the Federal Reserve’s target inflation rate of 2% per year.
The second metric shows that 52% of the weighted CPI had June inflation of 0.2% or less. Here is where the rent and OER components show their biggest impact as they were up 0.5% and 0.4% in June. Our first metric, however, shows that 54% of the weighted CPI had lower monthly inflation in June than in May, a figure that includes OER prices which rose less than in the prior month. In addition, 16% of the weighted CPI components experienced deflation (a decline in price) in June. Taken together, 70% of the weighted CPI components had either lower inflation or deflation in June; only 18% had higher inflation in June than in May.
Looking ahead, we expect measured inflation rates to stay above the Fed’s 2% target until rent inflation slows. But outside of the housing sector, low inflation is becoming the norm.
RCF Inflation Scorecard: June 2023
Analysis of Individual Components of the Consumer Price Index
Sources: Bureau of Labor Statistics and RCF Calculations, 1. Inflation direction indicates whether monthly inflation in June was higher or lower than monthly inflation in May. Deflation means prices fell in June compared to May.
Highlights:
- Although rents and owners’ equivalent rent inflation was above the 0.2% target in June, they are showing signs of moderating with rent inflation stable and OER inflation lower than in May. Most likely, the CPI measures of these prices are catching up to real-time indicators that show lower shelter cost inflation.
- Food-at-home prices were constant in June after only a 0.1% increase in May. But they are still 4.7% above where they were a year ago.
- Vehicle prices are returning to normal after huge spikes during the pandemic. New vehicle prices were flat in June while used car and truck prices fell 0.5% and are down 5.2% vs. last June.
- Household furnishing prices were also affected by supply chain problems, but they’ve now fallen for two months in a row.
- Often volatile motor fuel prices were up 0.9% in June following a 5.6% decline in May. They are down a whopping 26.7% compared to last June.
- The largest June price increases were for motor vehicle insurance and vehicle maintenance/repair. Their prices were up 1.7% and 1.3% respectively in June and are 16.9% and 12.7% higher than a year ago. This is likely another case of “inflation” reflecting issues in these markets more so than economy-wide price pressures.
- Lower inflation is helping to boost real incomes in 2023, reversing last year’s decline. Real hourly earnings are up 1.4% compared to a year ago while per capita after-tax income is up nearly 4%.
