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April US CPI review: give it another couple of months
While April's CPI report didn't see much change in the annual rate of inflation, that is likely to change dramatically by June, with major disinflation likely to be imminent.
Headline CPI’s YoY growth rate fell to 4.9% in April, from 5.0% in March (vs my 5.0% forecast, consensus 5.0%)
Core CPI’s YoY growth rate fell to 5.5% in April, from 5.6% in March (vs my 5.6% forecast, consensus 5.5%)
Used car prices grew at a very strong MoM pace that was over and above the implied change in wholesale used car prices.
New car prices also saw material MoM growth, but other nondurables prices saw a significant MoM decline.
YoY food at home price growth continued to moderate — interstingly, the more lagging CPI food away from home category also saw MoM price moderation.
As anticipated, the CPI’s rent based components saw a bounce back in their MoM growth rates, following an unusually large deceleration in March — the continued medium-term outlook is one of deceleration.
Services prices saw some mixed signals — internet services prices fell, motor vehicle maintenance prices continued to rise at a more moderate pace, but other personal services saw record MoM price growth.
Overall adjusted core services price growth continued to be above its historical average, but YoY growth declined for the second consecutive month. Relatively high comparables over the next two months could result in further YoY declines.
While there wasn’t much movement in overall YoY CPI growth in April, I expect this to change significantly in May and June, as high comparables are cycled.
I intend to release an updated medium-term inflation forecast in the near future — make sure you’re subscribed to Economics Uncovered to ensure that you don’t miss it.
April saw the CPI record its 10th consecutive month of disinflation, with its YoY growth rate falling from 5.0% in March, to 4.9% in April. This was slightly below my forecast, and consensus expectations, which were both pegged at 5.0%.
MoM growth of 0.5% was above its historical average increase of 0.3% for April (across 2010-19). Energy commodities was a big driver of MoM growth, contributing 16bps of the overall 51bp increase, as gasoline prices rose in April.
Core CPI inflation rose by 5.5% YoY, which was slightly below my estimate of 5.6%, but in-line with the consensus estimate.
MoM core CPI growth of 0.4% was again materially above its historical average, with the core CPI more heavily impacted by lagging shelter costs.
Let’s now get into the detail.
Used car prices surge, increasing well above the move implied by wholesale prices
While a large increase in used car prices was expected in April on account of previous increases in wholesale used car prices (as measured by the Manheim Used Vehicle Value Index (Manheim Index)), the actual increase was well in advance of the wholesale price read-through.
Given that CPI used car and truck prices tend to lag the Manheim Index by ~2 months, a simple read-through of Manheim Index data from February suggested a 3.7% MoM increase for CPI used car and truck prices in April — the actual number was 4.5%, which was the fastest growth recorded since June 2021.
This reverses what was seen in March, whereby CPI used car and truck prices rose by 1.0%, less than the Manheim Index read-through of 1.5%.
While March’s data suggested that the large increases in wholesale prices were not flowing through as significantly to retail prices (perhaps on account of weaker retail demand), April’s data instead suggests that retail prices were instead just slightly more lagging, with it taking a little longer than two months for wholesale price pressure to more materially transfer through to retail prices.
New car prices also rise, but a decline in other durables means that the overall change in durables prices was not that far above expectations
In addition to a major jump in used car prices, new car prices saw some acceleration in their MoM growth rate in April, with MoM growth of 0.3% the furthest above its historical average since October 2022.
Moving in the other direction was the CPI other durables category, which saw a decline of 0.2% in April — this marks the largest decline versus its historical average since January 2021 and the first time this component recorded MoM growth below its historical monthly average since November 2022.
With other durables working to offset some of the price growth from both used and new cars, the overall increase in durables prices was only slightly more than I had forecast, coming in at 0.9% MoM vs my forecast of 0.8%.
With significant wholesale used car price growth still likely to flow through to CPI used car & truck prices for another month, durables could see another month of strong growth in May, before moderating in June, with wholesale used car prices seeing MoM growth of just 0.1% in April.
Food at home price growth continues to decelerate — interestingly, so too did food away from home prices
As expected, CPI food at home prices continued to see a significant moderation in YoY growth, which fell to 7.1% in April, down from 8.4% in March. Given the major decline in underlying food commodity prices (which can be seen in the UN FAO Food Price Index), I continue to expect that the YoY growth rate for CPI food at home prices will see significant further moderation in the months ahead.
Assuming no material upward movement in wholesale food prices between now and the end of the year, I currently expect that YoY CPI food at home price growth is likely to fall back below 2% during the fourth quarter.
Interestingly, the CPI food away from home component, which is more lagging on account of its greater services focus, also saw a decleration in its monthly growth rate versus its historical average in April, where on such a basis, MoM growth was the most modest since March 2022. This is a welcome development after MoM price growth remained well above its historical average across Q1.
It will be important to see whether this remains a one-off, or the beginning of a new trend, which will require some additional months of moderation to confirm. Note that MoM growth moderated in November and December 2022, only to re-accelerate in Q1.
As expected, rent indexes see some bounce back, but this doesn’t change the likely medium-term downtrend
As expected, the CPI’s rent based indexes, owners’ equivalent rent (OER) and rent of primary residnce (RPR), saw a modest bounce back in their MoM growth rates, following a major deceleration in March.
The reason for this expectation, was explained in my April CPI preview:
“Following the large moderation in OER and RPR in March, I am conservatively anticipating some bounce back in April.
The reason for this, is that in addition to being lagging, OER and RPR are smoothed measures. This stems from only a small portion of the rental sample consisting of new leases in any given month, with the bulk of the sample instead consisting of continuing lease agreements.
As such, the indicators tend to see modest variations in their MoM growth rates. This can be seen in the data over the past two years, with MoM price growth gradually trending upward, and more recently gradually trending downward. The move in March was easily the largest deviation from the prior month’s change since January 2021. Given such a dynamic, I believe it’s conservative to forecast a modest bounce back in April.”
Despite the bounce back, the ongoing deceleration in underlying spot market rents, continues to undepin my expectation for a medium-term downtrend in the CPI’s rent based measures.
Services prices see mixed changes, but overall MoM growth remains hot
The adjusted core services category (to which I exclude lagging shelter costs, indirectly measured health insurance prices, and the no longer monthly measured household operations component) saw some mixed signals in April.
After seeing very strong price growth across most months since October 2022, interent services prices fell in April, recording their largest negative deviation from their historical monthly average growth rate since Feburary 2022.
For the third straight month, motor vehicle maintenance prices recorded more moderate MoM price growth versus historical norms, as compared to what was seen from June 2022 to January 2023.
Given the impact that motor vehicle repair costs have on vehicle insurance costs, this could have an important flow through to motor vehicle insurance prices, which have been seeing large price rises.
While still growing at a very strong rate in April, MoM growth was somewhat closer to its historical monthly average than was seen in prior months.
Other personal services, which includes items like haircuts, legal, funeral and laundry services, saw a MAJOR increase in MoM growth in April, rising by 1.5% — this was the highest monthly growth ever recorded for this data series, which dates back to 2010.
Overall, adjusted core services prices continued to see MoM growth that was materially above its historical average, albeit slighlty less so than in any other month in 2023.
With a large comparable rolling out of the YoY equation, the YoY growth rate saw its second consecutive monthly decline, falling to 5.8%. With relatively high comparables to be cycled in May and June, the YoY growth rate could fall further over the next two months.
The disinflation cycle continues — and is likely about to get a whole lot more significant
Putting it all together, the CPI recorded its 10th consecutive month of YoY deceleration in April. Looking ahead, we can see that it’s very likely to get a whole lot more significant.
The reason for this stems primarily from the 2nd key phase of the disinflation cycle — nondurables prices. Barring a sudden major surge in oil or food prices, the YoY growth rate of nondurables prices is set to fall drastically over the next two months, as the large 2.1% and 2.4% MoM increases from May and June 2022 roll off the YoY calculation.
With high durables price growth from June 2022, and services price growth in both May and June 2022, also set to roll-off the YoY calculation, I expect a major moderation in the CPI’s growth rate over the next two months.
I’ll be providing an update to my medium-term US CPI inflation forecast in the near future, which will be published, right here, on the Economics Uncovered Substack page.
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