- by New Deal democrat
No economic news again today. Tomorrow we will get the CPI report for November. As to which, I have read a few posts in which the claim is made that inflation, especially core inflation, is picking up again. It certainly could happen, but in my opinion the evidence for such a claim at present is pretty weak.
Let me start with the below graph that arrives from Apollo Investments via Carl Quintanilla:
Notice the emphatic arrow at the far right. But then take a look at the actual lines on the graph. Neither the 3, 6, nor YoY averages are moving up. The only basis for the arrow is the one month change, annualized. So in the next graph below I have decomposed the one month changes in core inflation (blue) into shelter (red) and core services less shelter (gold):
At root, the basis for that upward arrow is a one month very low reading for shelter in June, and an increase especially in services less shelter in September and October.
Another graph I came across puts this in good perspective, decomposing the contributions to headline CPI into food and energy, goods, shelter, and services ex-shelter:
Since food and energy aren’t included in core inflation, we can ignore those bars. And goods obviously are not contributing to inflation at all. So what we see is that the decelerating contribution by shelter (blue) has slowed, while the contribution from services ex-shelter (green) has held steady and actually increased a little.
As to shelter, here is the most recent update of house prices vs. owners equivalent rent:
There is simply every reason to believe that OER is going to continue to decelerate, although the YoY comparisons are more challenging.
As to rent of primary residence, here is the latest Apartment LIst National Rent Report:
Rents on new leases are simply not going up. As multi-year leases from 2021 and 2022 continue to roll off, this portion of CPI ought to continue to decelerate as well.
Finally, core services ex-shelter are dominated by transportation costs, in particular motor vehicle insurance and repairs. As I have written in the past, these are if anything even more lagging than OER:
They respond to previous increases in car prices, as the parts used for repairs of those vehicles also increase in price, and insurers respond to those collision and repair claims with increased premiums.
As to which, I saw another piece yesterday suggesting (used) vehicle prices were starting to rise again. Here’s the most updated graph of average hourly wages vs. new and used car prices:
It’s true that car prices are finally stabilizing again, as new vehicle production has ramped up to that prior to COVID, but any sustained surge looks unlikely. Used vehicle prices are somewhat noisy, so the one month increase in October doesn’t yet look like it is terribly significant.
Meanwhile, for what it’s worth, gas prices just made a new 3 year low:
Although by definition that doesn’t fit into core inflation, it’s still very good news for headline inflation.
The bottom line is that, excluding shelter, inflation is about average compared with the decade before the pandemic. Shelter remains the big issue, and there is every reason to believe it will continue to decelerate:
We’ll see tomorrow.
