Core is Now More
Peter Bernstein, Chief Economist, pbernstein@rcfecon.com, 312-431-1540 x1515
The Current Situation
The CPI increased just 0.1% in March which brought down year-over-year inflation to 5.0% in March, the lowest reading in two years and a meaningful decline from the mid-2022 peak of 9.1%. That earlier peak was driven by increasing food and energy prices following Russia’s invasion of Ukraine. Core inflation (excluding food and energy) was less affected and had consistently run lower than overall inflation. That is no longer true. In March, core inflation was 5.6%. Higher core inflation is also seen in the monthly data with core prices rising 0.4%. Core inflation has also proven to be much stickier. The 5.6% reading in March is barely lower than the core peak of 6.6%.
But despite the persistence in core inflation, there was mostly good news in the March report. For sure, the 0.1% increase in overall prices was a positive sign. In addition, housing inflation cooled, with rents and owner-equivalent rents increasing 0.5%, their lowest monthly increases since last spring. And housing prices have been a big contributor to higher inflation. Excluding housing, overall CPI inflation was 3.4% in March and core inflation was 3.7%. A further slowdown in rent and housing costs will do a lot to reduce inflation measures given the large weight these have in the CPI index. Finally, our detailed analysis of the individual components of the CPI index reveals important improvements in the direction and level of inflation.
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.
Both metrics improved in March. Just under half of the weighted CPI index showed lower inflation or deflation in March, the highest value for this metric since October 2022. And prices fell in March for more than a quarter of the weighted index, the largest deflationary reading since inflation started rising in 2021. That’s crucial because continued deflation in some categories will not only lower the overall inflation rate but also offset the past impacts of higher inflation on household finances.
Our other metric also showed improvement with about 60% of the weighted index having a March price increase greater than 0.2%. That’s also the lowest reading for this metric since 2021. Thus, despite unpleasant numbers on core inflation, our metrics are showing signs that price increases are becoming less widespread.
RCF Inflation Scorecard: March 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 March was higher or lower than monthly inflation in February. Deflation means prices fell in March compared to February.
Highlights:
- Prices fell in March for more than a quarter (26.4%) of the weighted CPI components. Food-at-home prices fell 0.3%, finally giving some relief to grocery shoppers. Household energy and motor fuel prices also declined with motor fuel prices 17.3% lower than a year ago. These food and energy price declines explain why overall inflation in March was so much lower than core inflation.
- Used car and truck prices also fell in March and are down 11.2% vs. a year ago, reversing some of the huge price increases from the last two years.
- Although rent and owner equivalent rent inflation declined in March, both are up more than 8% compared to a year ago. As we noted earlier, housing cost increases have been a major contributor to higher inflation so any slowdown here will be a key contributor to lower overall inflation.
- Public transportation (which includes airfares) was up 3.2% in March, the same as February’s sizable increase. Prices are up 12.4% compared to March 2022.
- The persistence of core inflation is also reflected in differences between price trends for services versus goods. Goods prices (38% of the weighted CPI) are up less than 2% year-over-year while prices for services (62% of the weighted CPI) are up more than 7%.
