- by New Deal democrat
The Fed is really facing a no-win situation. Between the recent employment reports, the QCEW, and even this morning’s jobless claims report, the jobs market has clearly been weakening, and may be on the very cusp of contraction, implicating the Fed’s dual mandate to strive for full employment. But this morning’s CPI report shows that reviewed inflation is beginning to percolate through the economy as well. About the only silver lining is that shelter inflation continues to abate, and is almost at its pre-Covid range.
For the record, let’s start with the month over month numbers for headline inflation (blue), core inflation (red), and inflation ex-shelter (gold) for the past two years:
Note that I am no longer including the big inflationary spike of 2021-22. Note that the last three months of both headline and core inflation show no deceleration at all, and are actually closer to their highest monthly readings of the past 24 months. In other words, the deceleration in consumer inflation has stopped.
Here is the YoY% look at the same data:
This now clearly shows an uptrend in non-shelter inflation and a smaller but notable increase in headline inflation, with no deceleration in the past 12 months flat YoY core inflation.
Now let’s look at the silver lining: shelter, as usual comparing the YoY% changes in the repeat home sales indexes, which lead by about 12-18 months (/2.5 for scale), to CPI for shelter (red). YoY home price increases are near or at multi-year lows, and shelter inflation has followed. While shelter CPI increased 0.4% in August, on a YoY basis it is up 3.6%, its lowest level since October of 2021. The below graph includes several years before Covid to show that this is actually at the very top end of its 3.2%-3.6% range during the latter part of the last expansion:
Now let’s look at the silver lining: shelter, as usual comparing the YoY% changes in the repeat home sales indexes, which lead by about 12-18 months (/2.5 for scale), to CPI for shelter (red). YoY home price increases are near or at multi-year lows, and shelter inflation has followed. While shelter CPI increased 0.4% in August, on a YoY basis it is up 3.6%, its lowest level since October of 2021. The below graph includes several years before Covid to show that this is actually at the very top end of its 3.2%-3.6% range during the latter part of the last expansion:
On a monthly basis, actual rent increased 0.3%, while fictitious owners’ rent increased 0.4%. On an YoY they advanced 3.4% and 4.0% respectively, the lowest YoY% increases since the end of 2021:
Let’s take a look at a few other areas of interest.
First, new car prices continue to be largely unchanged, down -0.1% for the month and up only 0.7% YoY, while the story for used car prices is completely different, as they increased 1.0% monthly and are up 6.0% YoY. Still, on a long term basis the two are within their historic relative ranges, as shown in the below long term graph which is normed to their early 1980s prices:
I suspect the rebound in used car prices is because car loan interest rates may be causing a bigger percent of purchasers to go to lower cost used vehicles.
Next, transportation services (mainly car repairs and insurance) lag the prices of new and used cars. Inflation here has returned to below 4.0% YoY this year. But note that inflation in maintenance and repairs has increased from 5.0% to 8.5% YoY in the past three months:
I suspect this is a direct result of the impact of tariffs.
Next, recently price increases in medical care services have also re-accelerated, and again this month increased 0.3% for a 4.2% YoY increase:
Finally, gas for utilities and electricity costs have also turned up sharply this year. In August the former increased 2.5% and the latter 1.0%. On a YoY basis, they are up 13.8% and 6.2%, respectively:
At least some of this is probably due to a sharp increase in demand caused by the enormous use of electricity in data-mining plants used for AI. Ordinary residential customers are not going to be thrilled, to say the least.
In sum, August’s consumer inflation report continued the trend of the two previous months, in which I wrote that consumer inflation was in a transitionary period. In August, the transition is further along, with shelter having disinflated to the cusp of its pre-COVID range, while inflation elsewhere has re-accelerated. The Fed is in the unenviable position of having to pick its poison, while there is massive political pressure to print free money for T—-p.
