- by New Deal democrat
Much like last month, February benefited from shelter and gas prices - for a change - pulling in the same, disinflating, direction. Needless to say, I do not expect that to be the case for March! But in the meantime, let’s look at the continued (more or less) good news.
Beginning in late December, gas prices fell below $3/gallon, and they were still under $3/gallon at the end of February. Meanwhile, as I have been pounding the table for several years, I expected shelter CPI to follow house prices to minimal YoY gains. In February, both delivered as shelter increased only 0.2%, and gas declining -0.3%. As a result YoY headline CPI came in at 2.4%, tied with January for the lowest except for one month since the pandemic, and core CPI came in at 2.5%, also tying its January reading for the absolute lowest since the pandemic.
IMPORTANT CAUTIONARY NOTE: Because the October-November kludge in shelter prices of a mere 0.1% increase for two months is still present in the YoY calculations, and will be until this coming November, this is probably continuing to lower those comparisons by roughly -0.2%. In other words, take out that kludge and YoY headline CPI would probably be 2.6%, and core at 2.5%.
But to the slicing and dicing: as per my usual practice for the past several years, let’s start with the YoY numbers for headline inflation (blue), core inflation (red), and inflation ex shelter (gold), which was only up 2.1% YoY. The below link goes to the relevant graph [Note: I expect this tech issue to be solved by the end of the week, as soon as my local tech guy has time to meet with me. Also cross your fingers that this does not happen every time Apple updates its OS]:
The good news is that all three of these measures have decreased since September. This has continued to be a significant disinflationary pulse.
As per my comment above, rent increased only 0.1% for the month, the lowest such increasse in 5 years, and owners’ equivalent rent only 0.2%, the lowest since April 2021 except for last September. On a YoY basis, rent (red) was up 2.7% and Owner’s Equivalent Rent (blue) up 3.2%, the lowest YoY increase for both since late 2021::
As per my comment above, rent increased only 0.1% for the month, the lowest such increasse in 5 years, and owners’ equivalent rent only 0.2%, the lowest since April 2021 except for last September. On a YoY basis, rent (red) was up 2.7% and Owner’s Equivalent Rent (blue) up 3.2%, the lowest YoY increase for both since late 2021::
One of the very best things I have been telling you since way back in 2021 is that the YoY% changes in the repeat home sales indexes lead shelter CPI by about 12-18 months. It did that on the way up, and it has been doing that on the way down. YoY home price increases continue near or at multi-year lows, the FHFA at 1.7%, and Case Shiller’s national index at 1.3%. And shelter inflation has followed (additionally yesterday we found out that the median price for existing homes had increased only 0.3% for the second month in a row). The graph linked to below includes several years before Covid to show its 3.2%-3.6% range during that time:
Shelter inflation has declined to *below* its pre-pandemic YoY range. Needless to say, because of the leading/lagging relationship of house prices to shelter inflation, we can expect even *further* deceleration in the shelter component of inflation during this year.
Let’s take a look at a few other areas of interest.
Although I won’t bother with a link to a graph, as noted above gas prices declined -0.3% in February. Energy as a whole increased o.3%, but for the entire last 12 months is only up 0.5%. Enjoy it while you can!
Additionally, new car prices (red) were unchanged for the second month in a row, and up only 0.5% YoY, while used car prices (gold)declined another -0.4%, and are *down* -3.2% YoY. The graph linked to below also shows the post-pandemic trend by norming both series to 100 as of just before the pandemic:
https://fred.stlouisfed.org/graph/fredgraph.png?g=1TjV2&height=490
Both new and used car prices have been basically flat for the past three years. Above I also show average weekly wages for nonsupervisory workers (blue) to show that in real terms, car prices are actually *lower* than just before the pandemic (interest rates for car loans are another issue!).
Two recent “problem children,” I.e., sectors that have increased in price by 4% or more YoY, have been transportation services, mainly vehicle parts and repairs as well as insurance; and electricity and gas prices. The former is now only up 2.3% YoY. This divides into insurance, only up 0.2% YoY (not shown below), and motor vehicle maintenance and repairs, still problematic at up 5.6% YoY (red):
Electricity prices, which have become a significant problem, likely a side effect of the building of massive data centers for AI generation, declined -0.7% in February, but on a YoY basis are up 4.8%. Additionally, piped utility gas increased another 3.1% in February, and is up 10.9% YoY:
As I wrote in the last few months, the electricity issue has already created a backlash, and I expect that backlash to intensify.
One new significant problem child is medical care services (blue in the graph linked to below), which increased 0.6% for the month and 4.1% YoY. The dental care component (not available on FRED) increased 1.3% on a monthly basis and hospital care (red) increased 0.9%. On a YoY basis they are up 6.5% and 7.6% respectively:
There were several other minor “problem children” in the form of nonalcoholic beverages, tobacco products, and airline tickets, but all of these are small fry in the larger CPI scheme.
Needless to say, given what has been happening with gas prices in the past two weeks, I do not expect a quiet headline number in March. So enjoy this tame consumer inflation report for the second month in a row , driven by disinflating shelter and (temporarily) energy costs. It is pretty clear that no further progress is likely in the near term towards the Fed’s 2.0% target, although disinflation in the shelter component (1/3rd of the total) should continue. I am additionally concerned about the increase in medical services costs. I don’t have any particular insight into those, but if they continue they will be an important new drag on consumers, whether directly or by insurance premiums.