- by New Deal democrat
The drought of significant official economic data continues today, but this is a good time to update my forecast for the effect of the spike in gas prices on inflation, specifically for May.
To reiterate, my back of the envelope calculation is to take the percent change in the price of gas, divide it by 16, and then add 0.15% for the average gain in other prices over the longer term. It’s definitely not exact, but it does serve as a good first order estimate.
So let’s put together the pieces.
The most updated data we have is from GasBuddy, which estimates that for the last two weeks, national gas prices have averaged $4.50, +/-5 cents:
Yesterday the Department of Energy updated their weekly average, which came in at $4.49. On a monthly basis, so far May has averaged $4.48, a $0.38 increase over April’s $4.10 average:
That’s a 9.3% increase in gas prices for the month so far. When we perform my back of the envelope calculation, that amounts to a 0.7% increase in CPI in the month of May (blue in the graph below). But because shelter also plays such a huge role in consumer inflation (about 1/3rd of the total), the below graph in addition to showing headline CPI (red) also includes CPI less shelter (gold):
My forecasting method matches CPI ex shelter somewhat more closely than headline inflation.
So let’s take a look at shelter inflation. My forecasting method for that uses a 12-18 month lag in Owner’s Equivalent Rent, which has continued to decelerate slowly:
In the graph above, you can see that, with the outstanding exception of last month, shelter inflation has been trending in the +0.2% monthly range. If that continues, based on the current increase in gas prices this month, I would expect headline inflation to come in at 0.5% - which, as it happens, is the (rounded) current estimate for May inflation by the Cleveland Fed:
So, what would a 0.5% increase in CPI in May portend for real wages and payrolls? Here’s the month over month change in each for the past 12 months:
Nominal monthly wage gains have averaged 0.3% in the past year, while nominal payroll increases have averaged between 0.4% and 0.5% in the past six months. Which means that if the CPI increases 0.5% in May, real nonsupervisory wages will decline further both monthly and YoY, and real nonsupervisory payrolls will at best stay even monthly, but remain below their peak from last December. Which in turn means that there is an increased likelihood that consumers will start to cut back on other purchases, although we won’t find that out until personal income and spending are reported at the end of this month.
Finally, there is reason to suspect that gas prices at the pump will increase somewhat further by the end of the month, because gas price futures have been hovering near the top of their range for the past week:
We’ll see, but the bottom line is that the current inflationary episode does not appear to be ebbing yet.
