January US CPI preview: expecting slightly hotter headline but core in-line with consensus

After falling from a YoY growth rate of 9.1% in June 2022 to 6.5% in December, I expect US inflation to fall further in January. My forecast is slightly above consensus on a headline basis, but slightly below consensus on core inflation.

Let’s dive in to my latest CPI preview, beginning firstly with durables prices.

Rise in used car prices was at the wholesale level — changes generally occcur with a lag in the CPI

After rising by an enormous YoY rate of 18.7% at their peak in February 2022, durables prices have seen a MASSIVE turnaround, with YoY prices falling into outright DEFLATION just 10 months later.

A key catalyst for this turnaround has been the sharp declines that have been recorded in CPI used car and truck prices, which have fallen for five consecutive months.

Though with the Manheim Used Vehicle Value Index recording growth over the past two months, many have begun to suggest that durables prices will turn higher. There’s two caveats to this. The first thing to note is that the most commonly cited figures for the Manheim Used Vehicle Value Index, are seasonally adjusted. As opposed to recording two consecutive months of price growth, the raw, non-seasonally adjusted data, continued to see declines until December, with price growth so far only seen in January.

When making comparisons to the CPI, I prefer to utilise raw, unadjusted numbers, as I use non-seasonally adjusted data in my CPI forecasts. When bringing in data from outside the BLS, this can help to avoid conflicting seasonal adjustment procedures from influencing the data analysis.

The next point to note, is that the Manheim Used Vehicle Index is a measure of wholesale prices paid at auctions open to professional industry buyers — it is not a measure of prices paid by consumers. While changes in wholesale prices do flow through to rental prices, it’s important to recognise that that there is a ~two month lag between changes in the Manheim Used Vehicle Index, and the CPI’s used cars and trucks index.

This historical lag suggests that forecasting a rise in CPI used car prices in January is premature. Given that non-seasonally adjusted used car prices rose in January, historical correlations suggest that this won’t translate into a rise in CPI used car prices until March.

As a result, I forecast another decline in CPI used car and truck prices in January. I expect that seasonal factors will contribute to growth in the rest of the durables index.

It is important to also note that the expected disinflationary impact of declining used car prices in January has been reduced versus the impact of declines in prior months, as the CPI used cars and trucks index has received a much lower weighting in the CPI’s now annual update of weights.

Taken as a whole, I am forecasting the 5th consecutive MoM decline in CPI durables prices in January. This would result in the CPI durables index extending its YoY decline to 1.5%.

Continued deceleration in CPI food at home prices expected

I expect that food prices will continue to decelerate towards their historical monthly average growth rate in January, with the UN FAO Food Price Index declining for the 10th consecutive month in January.

Given that the CPI food at home index is significantly directionally correlated to the UN FAO Food Price Index on a 6-month lagged basis, the months ahead are likely to see a significant reduction in the YoY growth rate of CPI food at home prices.

With 10 months passing since the initial MoM decline in the UN FAO Food Price Index, the process of decelerating price rises in CPI food at home prices has indeed been underway for sometime now. This can be seen both in the clear turning lower of the YoY growth rate in CPI food at home prices, as well as the deceleration in MoM growth towards the historical average.

CPI food away from home prices are also moving lower

In addition to decelerating food at home price growth, food away from home prices (which includes items like restaurant spending) are also decelerating. This is important as this provides an indication of not just underlying food commodity prices, but the broader pressures that exist in running establishments like restaurants.

Gasoline prices rise in January, adding upward CPI pressure

In contrast to decelerating food prices, gasoline prices saw an average MoM rise of 4.0% in January. This is expected to largely correlate with the change in the CPI energy commodities index, adding upward pressure in January.

Despite falling spot market rents, CPI rent based measures have continued to grow at a brisk pace

While spot market rents declined for a fourth and fifth consecutive month in January according to Apartment List and Zillow data respectively, the lagging rent based measures in the CPI have so far continued to grow at high rates.

While the ongoing convergence between lagging CPI based rents, and underlying spot based measures, will eventually result in the CPI’s rent measures moderating, a moderation is yet to occur.

Indeed, the owners’ equivalent rent (OER) index saw a larger MoM increase in December than it did in the prior month. Both OER and the rent of primary residence indexes continued to record MoM growth that was around the highest seen in the current high inflation cycle.

Given the lack of any clear deceleration in the lagging CPI rental based indexes, I continue to forecast another month of high growth for both indexes, but given the ongoing convergence to spot market rents, I remain on the lookout for a clear sign of MoM price moderation.

Seasonality & gasoline to see higher MoM CPI growth

With January being a relatively strong month for seasonal inflation (including for items like food at home), as well as there being a significant shift higher in January’s gasoline prices versus a major MoM decline in December, I expect a significant uplift in MoM CPI inflation in January versus December.

I forecast a MoM CPI increase of 0.7% (non-seasonally adjusted) versus the -0.3% that was recorded in December.

For the core CPI, I forecast a MoM increase of 0.5%, versus the 0.2% that was recorded in December.

While this may continue to drive talk of a resurgence in inflation, do I believe that YoY CPI inflation will shift higher over the months ahead? No.

Again, part of the higher expected reading in January is due to seasonal factors (with MoM CPI growth historically strongest between January-May).

MoM price growth on both the headline and core CPI measures, are again expected to be BELOW that recorded in the same month of the prior year, which as discussed below, would see a further moderation in the YoY CPI growth rate.

Further still, the CPI is being OVERSTATED by lagging shelter costs. As I discuss further below, both CPI ex-shelter and core CPI ex-shelter, have declined significantly from their peaks. I also expect that MoM growth in core CPI ex-shelter will remain modest in January.

Higher prior comparable expected to see a further YoY decline in the CPI — but my headline forecast is slightly above consensus

In terms of the YoY impact, my forecast is for headline CPI inflation to see its seventh consecutive month of deceleration, falling to 6.3% in January. While a continued decline, this is slightly ABOVE the consensus forecast of a decline to 6.2%.

Core CPI forecast in-line with consensus

In contrast to my forecast for headline CPI, which is slightly above the consensus forecast, my forecast for YoY core CPI growth of 5.5%, is in-line with the consensus forecast.

In order to better see how inflation has shifted, lagging rents need to be excluded

Given the significantly lagging nature of rental measurement in the CPI, in order to gain a better understanding of the inflation picture, shelter costs should be excluded.

When doing so, one can see how much more significant the disinflation has been. Headline CPI ex-lagging shelter peaked at 10.8% in June 2022 (versus 9.1% for the CPI), and hit 5.9% in December. I forecast it to fall further, to 5.4% in January. This would represent a halving in seven months, and the lowest reading since May 2021.

Core CPI ex-shelter has fallen from a peak of 7.6% in February 2022, to 4.4% in December. I forecast modest growth for core CPI ex-shelter in January (0.2%), resulting in the YoY rate of growth falling significantly further still, to 3.6% — a level last seen in April 2021.

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