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US CPI Review: August 2023
A divergence in car prices, falling airfares, broad disinflation & more - my August US CPI Review in 12 key points.
In reviewing the latest US CPI data, I have formed 12 key points, which are as follows:
August’s aggregate CPI indices were in-line with my forecasts.
A big gap has opened up between wholesale and retail used car prices.
Food price growth sees a further deceleration.
Energy commodities jump, but a much more modest MoM move appears likely for September.
Rent based measures are trending lower, but remain elevated.
Education & communication services prices continue to decelerate.
Airfares keep falling even as jet fuel prices surge, hurting airline margins.
Motor vehicle related expenses continue to surge.
Volatility in recreation services & other personal services prices continues, but a disinflationary trend remains.
FLASH SEPTEMBER ESTIMATES: unadjusted CPI
headline CPI: 3.6% (from 3.7% in August)
core CPI: 4.1% (from 4.3% in August)
FLASH SEPTEMBER ESTIMATES: spot market rent adjusted CPI
headline CPI: 1.0% (from 1.0% in August)
core CPI: 0.8% (from 0.9% in August)
CPI disinflation is widespread — only a handful of lagging components are yet to show disinflation.
Let’s now breakdown each of these key points in detail.
1) August’s aggregate CPI indices were in-line with my forecasts
In August, the headline CPI saw YoY growth of 3.7%, which was in-line with my forecast (vs 3.6% consensus).
Core CPI growth of 4.3% was also in-line with my forecast (vs 4.3% consensus).
On a spot market rent adjusted basis, the CPI increased by 1.0%, and the core CPI increased by 0.9% — both of which were in-line with my forecasts.
2) A big gap has opened up between wholesale and retail used car prices
Following large prior declines in wholesale used car prices, CPI used car and truck prices saw a material MoM decline in August, falling by 1.4%.
While a material MoM decline was recorded, for the third consecutive month, the MoM change was well above what a two month lag of the Manheim Index implied (-3.8%). As a result, a material divergence (easily the largest seen since 2022) has now opened up between retail (CPI) and wholesale (Manheim) used car prices.
Given increases in auto loan rates, improved new car supply, and declines in the M2 money supply, I would expect retail prices to converge towards wholesale prices over time, meaning that in the absence of a material increase in wholesale used car prices, significant additional disinflation likely remains in the pipeline for used car prices.
Though on the flipside, the relative resilience in retail used car prices suggests that consumer demand may still be robust, which in-turn, could lead to wholesale prices moving higher in the nearer-term — note that wholesale used car prices did increase by 0.9% MoM in August. Should wholesale prices rise materially, the gap that currently exists between wholesale and retail prices also leaves open the possibility that retail prices don’t see as dramatic of a move higher.
3) Food price growth sees a further deceleration
In my US CPI Preview, I noted that despite a month of relatively stronger food at home price growth in July, that I expected MoM growth to return to more modest levels in August on account of the prior moves that had already taken place in underlying food commodity prices.
This is exactly what happened, with MoM growth coming in 0.1% below the historical (2010-19) average for August.
On an annual basis, growth declined from 3.6% in July, to 3.0% in August (exceeding my expectation for a decline to 3.1%). Note that the below chart also illustrates how the prior move in underlying food commodity prices supports a continued deceleration in CPI food at home prices.
Turning to CPI food away from home prices, where whilst MoM growth was hotter than in July, it nevertheless came in at a level that continued to signal a deceleration in price growth, which in comparison to its historical average, was the second softest reading that has been seen since March 2022.
This saw YoY growth fall from 7.1% in July, to 6.5% in August. Given the moderation that has occurred in MoM growth, I currently expect annual CPI food away from home price growth to see a further moderation during 2H23.
Given greater services related costs, CPI food away from home prices have been much more lagging than food at home prices in the current high inflation cycle — the ongoing deceleration in this metric is thus a welcome sign of spreading disinflation.
4) Energy commodities jump, but a much more modest MoM move appears likely for September
Given the significant rise in gasoline prices in August, the CPI’s energy commodities index jumped higher in August, rising by 6.1% MoM.
This saw the YoY decline in the energy commodities index fall from -20.3% in July, to -4.2% in August. As a result, the argument that the CPI is being artificially compressed due to base effects from the energy commodities index, no longer applies — indeed, come December, when a 12.4% MoM decline is due to roll out of the YoY equation, the opposite argument could be applied.
With monthly average gasoline prices for September currently in-line with the level recorded in August (as per AAA data), in the absence of another imminent spike higher, the change in the CPI’s energy commodities index is likely to be much more modest in September.
5) Rent based measures are trending lower, but remain elevated
Despite an ongoing deceleration in spot market rental growth, the CPI’s lagging rent based measures saw another month of stubbornly high growth in August, with the unweighted MoM average change in owners’ equivalent rent (OER) and rent of primary residence (RPR) increasing from 0.45% in July, to 0.47% in August.
While OER saw MoM growth fall from 0.49% in July to 0.43% in August, RPR moved in the other direction, rising to 0.51% in August after seeing MoM growth fall to 0.41% in July.
On account of the way OER and RPR are calculated, they not only lag spot market rents, but are smoothed measures. As such, I have continued to state that one should only assume a gradual deceleration in MoM growth. While a significant moderation was seen in March, MoM growth has been largely stable since, averaging out to a gradual moderation.
Looking at MoM growth in comparison to the historical average monthly growth rate, shows that price growth has continued to decelerate in recent months, despite the overall raw unadjusted MoM numbers remaining fairly stagnant.
With spot market rents (as per Apartment List data) beginning to record MoM declines as we begin moving through a seasonally weaker period for rental prices, and OER and RPR continuing to record elevated growth rates, the gap between the Apartment List Rent Index and the CPI’s rent based measures continues to converge, with RPR now almost overtaking the Apartment List Rent Index.
This convergence should lead to an ongoing moderation in the MoM growth rate of both OER and RPR.
6) Education & communication services prices continue to decelerate
For the third time in the past four months, the CPI’s education & communication services index saw MoM growth that was well below its historical average — MoM growth was 0.3% in August versus an average increase of 0.6% in August across 2010-19.
Lower MoM growth was supported by a smaller than average increase in tuition & other school fees (up 0.7% MoM vs 2010-19 August average of 1.2%), telephone services (-0.2% MoM vs 2010-19 August average of 0.0%), and postage & delivery services (-0.4% MoM vs 2010-19 August average of 0.0%).
With prices declining for six consecutive months, postage and delivery services prices have seen some particularly significant falls — July’s MoM decline was the 2nd largest that has ever been recorded in data that dates back to 1998. Over the past 6 months, CPI postage and delivery services prices have declined by an annualised rate of 4.3%.
Though one component of the CPI education & communication services index that has been moving in the other direction are CPI internet services prices, which continue to see elevated MoM growth in August (up 0.4% MoM vs 2010-19 August average of -0.2%). Annual growth reached 5.2% in August, the highest level that has been since April 2009.
7) Airfares keep falling even as jet fuel prices surge, hurting airline margins
Over recent weeks, a host of US airlines have announced profit downgrades for the third quarter. Given the relative moves that have been seen in jet fuel prices and airline fares over 2023, it’s easy to see why.
From January to May, the BLS recorded an 11.2% increase in airline fares. Across the same time period, the EIA recorded a 25.0% decline in monthly average jet fuel prices, generating a significant margin tailwind.
Since then, the trend has flipped.
With airline fares entering their seasonally weaker period, prices have fallen 17.5% since the end of May. At the same time, jet fuel prices have increased by 37.6%, generating a significant margin headwind.
While the 2.8% decline in airfares in August was less than the historical average decline of 3.8% for August across 2010-19, to see a continued material decline in airfares in spite of the surge in jet fuel prices, suggests that airlines may be losing some of their pricing power — with the M2 money supply declining, this is likely to be a growing theme across the wider economy over the medium-term.
8) Motor vehicle related expenses continue to surge
Yet again, motor vehicle related expenses continued to surge in August.
Motor vehicle maintenance costs rose by 1.1% MoM, far outpacing the historical average increase of 0.2%. This represents the third consecutive month of extremely elevated growth, after some moderation was seen from February-May.
Growing at an even faster pace, was the CPI motor vehicle insurance index, which saw prices rise by 2.1% in August, equal to an enormous annualised rate of 28.9%.
This has taken YoY growth from 17.8% in July, to 19.1% in August — the highest rate of growth that has been seen since December 1976!
9) Volatility in recreation services & other personal services prices continues, but a disinflationary trend remains
In recent months, both the CPI recreation services, and CPI other personal services indices, have shown signs of a significant deceleration in price growth — albeit inconsistent ones.
This trend of inconsistency continued in August, with CPI recreation services prices recording MoM growth below the historical average, while CPI other personal services prices saw MoM growth significantly above the historical average — a reversal of what was seen in the prior month for each of these categories.
Looking at each category in more detail, for the third time in the past four months, the CPI recreation services category saw MoM growth that was either relatively more modest, or below the historical average. While there continues to be MoM volatility, the broader trend here continues to be one of a gradual deceleration in MoM growth.
As is the case with CPI recreation services, for three of the past four months, the CPI other personal services index has seen MoM growth that has been below the historical average, or at a relatively more moderate level versus some of the high MoM growth growth that had been recorded in prior months. Nevertheless, price moves remain volatile, with MoM growth once again well above the historical average in August.
10) FLASH ESTIMATES: Headline CPI expected to moderate slightly, core CPI expected to see a sixth consecutive month of moderation
My flash (provisional) estimate for the headline CPI is for a modest decline in its annual growth rate, falling from 3.7% in August, to 3.6% in September.
For the core CPI, I currently expect to see the sixth consecutive decline in its annual growth rate, falling from 4.3% in August, to 4.1% in September.
11) FLASH ESTIMATES: Spot market rent adjusted CPI indices expected to remain well below 2% — core CPI expected to see 19th consecutive month of YoY deceleration
On a spot market rent adjusted basis (using Apartment List data), my flash estimate for September is for the headline CPI to remain unchanged at 1.0% YoY.
For the core CPI adjusted for spot market rents, my flash estimate sees another moderation in the YoY growth rate, falling from 0.9% in August, to 0.8% in September. This would represent a staggering 19 consecutive months of moderating YoY growth.
12) CPI disinflation is widespread — only a handful of lagging components are yet to show disinflation
All in all, August’s US CPI report continued to highlight that disinflation is widespread, with only a small number of components continuing to rise at rates that are well above their historical averages.
As noted above, CPI internet services is one component that is continuing to see materially above average growth. OER and RPR also continue to record growth that is materially above average, but their MoM growth has decelerated from peak levels, and is likely to fall further on account of moves that have already taken place in spot market rents.
Motor vehicle insurance prices continue to rise at a very high pace, but again, this is a lagging indicator, with prices responding to the prior surge in used car prices, the return to normal driving patterns post pandemic, and an increase in motor vehicle repair costs.
The CPI’s new vehicles index is another component that has continued to see growth at levels that are well above its historical average. Though given the declines that have been seen in used car prices, the surge in auto loan rates on the back of the Fed’s aggressive tightening, and increases in new car inventory levels (Cox Automotive has reported that new car inventory climbed above 2m in August, the highest level since April 2021), new car prices would be expected to moderate in time.
Though depending on the ultimate impact of current union strikes in the automotive sector, which risks a material contraction in inventory levels, this may result in additional price support.
While a handful of items continue to see high MoM growth, looking at the CPI’s three key categories, shows clear and widespread disinflation.
Durables prices as a whole have not only disinflated, but remain YoY negative.
While rising in recent months and a potential upside risk to CPI growth, the CPI energy commodities index remains YoY negative, while both CPI food at home and CPI food away from home price growth has moderated significantly. As a result, CPI nondurables price growth has seen a major moderation over the past 18 months.
In the services category, the CPI education & communication services index has seen MoM growth that was materially below its historical average in three of the past four months. Meanwhile, CPI recreation services and CPI other personal services prices have also shown material signs of disinflation over recent months. With MoM growth in OER and RPR moderating from peak levels, even the most lagging component of the price cycle, being the CPI services category, has seen YoY growth moderate from peak levels.
That concludes my US CPI Review for August.
Note that following the release of September’s US CPI data, I intend to release an update to my medium term US CPI inflation forecasts — stay tuned!
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