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US CPI Preview: June 2023
Major additional disinflation is likely in June, with spot market rent adjusted inflation likely to fall BELOW 1%. Continuing to tighten amidst such a backdrop risks delivering a deflationary bust.
I expect June’s US CPI report to deliver significant additional disinflation, resulting in the 12th consecutive month of lower annual CPI inflation.
My forecasts are as follows:
Headline CPI: 3.0% vs 4.0% in May
Core CPI: 4.9% vs 5.3% in May
Headline CPI adjusted for spot market rents: 0.5% vs 1.8% in May
Headline core CPI adjusted for spot market rents: 1.7% vs 2.4% in May
In addition to the major decline in the headline CPI, adjusting the CPI for spot market rents shows that June’s inflation report is expected to provide significant additional evidence that high inflation should no longer be a key concern.
At the same time, the Fed’s stubborn focus on the lagging core CPI (which is more heavily exposed to lagging shelter and services prices) risks additional overtightening.
Instead of honing in on “core” inflation and articulating the need for additional interest rate hikes, the Fed should be focusing on the more relevant spot market rent adjusted inflation measures.
The Fed’s continued focus on lagging indicators (i.e. core inflation and services prices) as opposed to leading indicators (like the M2 money supply and durables prices), risks replacing one problem (high inflation), with a potentially even bigger problem (a deflationary bust).
In June, I expect another major deceleration in the annual growth rate of the US CPI.
As per usual, I will break down my CPI forecast into its three key categories: durables, nondurables and services — let’s begin.
After seeing very high monthly growth in the past two months (4.5% and 3.2% respectively), I expect monthly CPI used car and truck price growth to moderate SIGNIFICANTLY in June.
This expectation is based upon the price changes that have already occurred in the Manheim Used Vehicle Value Index, whose wholesale prices tend to lead the CPI’s retail prices by two months.
A two month lag of the Manheim Index points to MoM CPI used car & truck price growth of just 0.1% in June, and a decline of 1.7% in July.
Furthermore, the first half of June saw wholesale prices record another large decline — the Manheim Index was down 2.6%! This points to another month of large price declines for CPI used car & truck prices in August.
With large monthly increases in CPI used car prices now expected to be in the rearview mirror, I expect overall CPI durables prices to record a modest decline in June — a sharp reversal from the relatively high monthly growth that was seen in the past two months.
After remaining YoY negative over the past two months in spite of high monthly price growth for used cars, I expect the annual decline in CPI durables prices to increase in June.
Moving to nondurables, where in June, I expect to see further deceleration/increased annual price declines in its two key components, being food and energy.
Starting firstly with CPI food at home prices, it’s important to note that the UN FAO Food Price Index, which measures food commodity prices, tends to lead CPI food at home prices (which measures retail prices) by ~6 months.
Given the movements that have already occurred in the UN FAO Food Price Index, it continues to suggest that a further moderation in annual CPI food at home price growth lies ahead.
In June, I expect YoY growth to fall to 4.6%, down from 5.8% in May.
In contrast to the clear disinflation that has taken place in CPI food at home prices, CPI food away from home prices (which are more exposed to lagging services price pressures), have continued to record MoM growth that has been well above the historical average (from 2010-19).
While I expect another month of stronger than average monthly growth in June, given a high prior comparable, I expect the annual growth rate to fall from 8.3% to 7.7%.
With additional high prior year comparables to be cycled from July to October, I expect a further deceleration in YoY CPI food away from home prices over the months ahead.
Turning to CPI energy commodities, while the U.S. EIA recorded a modest increase in monthly average regular all formulations gasoline prices in June (+0.5%), with the CPI energy commodities index cycling huge growth of 9.3% from June 2022, I expect the annual change in the CPI energy commodities index to fall to -26.8% in June.
With June being one of the last months of high prior year comparables to be cycled, the annual decline in the CPI energy commodities index is likely to begin tapering significantly from July. I currently forecast that the CPI’s energy commodities index will turn YoY positive by December.
Moving to services prices, let’s begin by breaking down the largest component — shelter.
In addition to it being the largest component, it’s also critical to give significant attention to CPI shelter prices on account of their lagging nature.
The reason that CPI shelter prices are lagging, is that the CPI’s rental sample predominately consists of leases under fixed term contracts, of which the most common length is 12 months. This can cause wide discrepancies between CPI rents and underlying spot market rents, particularly during periods where there has been a large and sudden shift in underlying spot market rental rates.
Such wide and sudden changes in spot market rents were observed in the post-COVID period. The chart below shows that while Apartment List’s Rent Index hit a peak of 18.2% in November 2021, the CPI’s lagging rent of shelter component was recording annual growth of just 3.9%.
Today, the situation has flipped, with the Apartment List Rent Index recording annual growth of -0.1% in June, while the CPI’s rent of shelter index recorded annual growth of 8.1% in May, as it plays catch up to the prior increase in spot market rents.
For this reason, it’s important to also analyse the CPI on a spot market rent adjusted basis (which I do below), as this gives a better picture of the current underlying inflation rate.
Given that the CPI’s rental components (owners’ equivalent rent (OER) and rent of primary residence (RPR)) have been growing at a faster annual rate than spot market rents for many months, they have now sufficiently bridged the prior gap that had opened up, so as to allow for a deceleration in their monthly growth rates.
With the annual growth in spot market rents continuing to weaken, I expect a further gradual moderation in the monthly growth rates of OER and RPR over the months ahead.
Turning to some of the other services categories, important additional insights are likely to be gathered on both recreation services and other personal services prices in June.
CPI recreation services prices saw much lower price growth in March and May, but much higher than average price growth in January, February and April.
While I am conservatively forecasting another month of materially higher than average MoM growth in June, the general trend and direction in CPI recreation services prices remains unclear — which makes June’s data particularly important.
The situation is fairly similar for the CPI’s other personal services component. While record monthly growth was seen in April, much less significant monthly growth was seen in March and May.
As with CPI recreation services prices, I am forecasting materially stronger monthly price growth in June vs its historical average, but the broader direction remains unclear.
Again, June’s data will be important for helping to determine the direction in which price changes are heading.
Finishing with CPI energy services prices, I believe it’s worth highlighting the enormous plunge that has been seen in natural gas prices and the impact this has on CPI utility gas service prices.
On a monthly average basis, Henry Hub Natural Gas spot prices declined another 1.3% in June, taking their annual decline to an enormous 72.5%. This decline in spot natural gas prices has been translating to declines in CPI utility gas prices, where prices have seen large monthly declines in 6 of the past 8 months.
I expect the annual decline in CPI utility gas service prices to approach 20% in June.
Forecasting headline CPI growth of 0.3% MoM, 3.0% YoY
Putting it all together, I expect the headline CPI to record monthly growth of 0.3% in June. While this is above its historical average, it’s nothing to be alarmed about given the broader trend of disinflation that has been in place since 2H22.
The strong disinflationary trend that has been in place since 2H22 is expected to see the CPI record its 12th consecutive monthly moderation in its annual growth rate in June — I am forecasting annual growth to fall to 3.0%.
Forecasting core CPI growth of 0.3% MoM, 4.9% YoY
For the core CPI, I also expect MoM growth of 0.3%. Here the price trend looks far more concerning, with monthly growth continuing to be well in excess of its historical average across all of 2022 and 2023 to date.
While many are concerned by this trend, one needs to remember what’s driving the divergence to the overall CPI: a greater weighting to lagging shelter costs and services prices more broadly. Therefore as opposed to indicating what’s to come, the core CPI instead provides a picture of what’s already happened, with lagging services prices responding to the changes that have already occurred in durables and nondurables prices.
Given its lagging nature, the annual growth rate of the core CPI is expected to remain well above the overall CPI in June. Nevertheless, I do expect a noticeable drop to occur, with the annual growth rate falling to 4.9%, down from 5.3% in May.
Forecasting CPI adjusted for spot rents of 0.5% YoY, 1.7% YoY for core
Given the hugely lagging nature of the CPI’s rent measurements (recall that CPI rent of shelter was 8.1% YoY in May, versus -0.1% YoY for the Apartment List Rent Index in June), it’s important to look at the CPI on an ex-shelter, or spot market rent adjusted basis.
Doing so, reveals the extent of the MASSIVE disinflation that has been seen over the past year.
Adjusted for spot market rents, I expect the headline CPI to fall to just 0.5% in June, down from 1.8% in May. For the core CPI, I expect it to fall to just 1.7%, down from 2.4% in May.
By continuing to employ aggressive tightening in spite of the significant evidence that high inflation has dissipated (with strong price growth now confined to lagging shelter and services prices), the Fed risks repeating its prior mistakes in reverse, and replacing the problem of high inflation with one that could be even worse: a deflationary bust.
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