The continued slowing of rental inflation can be taken for granted. Inflation is slowing to a pace that allows for healthy real wage growth.
After being flat in October, there is a good chance the overall CPI will again show zero change in November. Gas prices fell sharply again last month, and with inflation elsewhere likely to be moderate, we could see a second consecutive month of zero inflation. This would be the first time since the shutdown period of the pandemic where we have seen two consecutive months in which prices didn’t rise.
Food
Inflation in store-bought food prices has slowed sharply in the last year, with the prices of many items now flat or even headed downward. The widely touted runup in egg prices due to the Avian flu’s impact on chicken flocks has been largely reversed. Egg prices are down 22.2 percent over the last year. Milk prices have also been headed downward, dropping 1.6 percent over the last year, although they went up 1.0 percent in October.
The index for store-bought food rose 0.3 percent in October and is up by 2.1 percent over the last year. There are always erratic movements in the month-to-month movement in the food index, but it is likely we will see a smaller increase in November. The October increase was driven in large part by a 1.0 percent jump in the meats index, which is not likely to be repeated.
New and Used Vehicle Prices Still Headed Lower
The shortage of cars due to supply chain issues and the fire at the Japanese semiconductor factory was a major factor driving inflation in 2021 and 2022. Now that production levels are pretty much back to normal, vehicle prices are headed downward.
New vehicle prices fell just 0.1 percent in October. They are likely to show a larger decline in November. New vehicle prices are still 20.8 percent above their level in February of 2020. Used car prices have been dropping since May. They fell 0.8 percent in October, but they had been falling more rapidly in prior months. Used vehicle prices are still 35.3 percent above their pre-pandemic level.
Of course, since people don’t buy cars often, most consumers will not be aware of the recent price declines. They will just see prices that are considerably higher than what they paid for their last car.
Prices of new vehicles had been close to flat in the years before the pandemic, while used vehicle prices had trended downward. They are a large share of the CPI indexes. New vehicles account for 4.2 percent of the overall CPI and 5.2 percent of the core index, while used vehicles account for 2.6 percent and 3.2 percent of the overall and core indexes, respectively. For that reason, big price movements in these items have a large impact on CPI inflation.
Other Supply Chain Goods
There are a number of other items that had sharp price increases during the pandemic and recovery that ordinarily have flat or falling prices. This list includes apparel, appliances, car parts, and household furnishings and supplies. Inflation has stopped in most of these categories and prices have flattened or even turned downward.
Still, they have far to go to get back near their pre-pandemic trend. The household furnishings and supplies index is 18.5 percent above its pre-pandemic level, the appliance index is 11.4 percent higher, and the motor vehicles parts index is 20.2 percent higher. Prices of these items may not fall all the way back to their pre-pandemic levels since we had three years above trend growth in wages, but we should expect them to get most of the way back. We should see falling prices in most of these indexes in November.
At this point, the continued slowing of rental inflation can be taken for granted. We know that indexes of marketed units are now showing near zero year-over-year inflation, with some indexes even showing year-over-year declines. Both the rent proper and owner’s equivalent rent indexes peaked at the end of last year, showing 0.8 percent monthly inflation. They have gradually slowed over the course of the year, with the rent proper index increasing by 0.5 percent and the owners’ equivalent rent index increasing 0.4 percent.
Both indexes are likely to show 0.4 percent increases in November. This matters hugely for measured inflation, since the rent indexes together account for 31 percent of the overall CPI and nearly 40 percent of the core index.
Non-Housing Core Services
The Fed has decided to make the category of non-housing core services a major focus of its inflation battle. This area is a mixture of very different types of services, and it is not insulated from the impact of non-core items.
For example, restaurant prices depend to an important extent on food prices. Restaurant prices had been outpacing food prices by roughly 1.0 percentage point a year before the pandemic. In the last year, they rose 5.4 percent, 3.3 percentage points more rapidly than store-bought food prices. Restaurant prices rose 0.4 percent in October, and we are likely to see a slowing in the rest of the year and into 2024 as both food inflation has slowed and wage growth in the restaurant industry.
Inflation in medical care services has been surprisingly moderate, with prices actually falling by 2.0 percent over the last year. This moderation has primarily been the result of the quirky pattern shown in the health insurance index, which dropped by 34.0 percent over the last year. The health insurance index rose 1.0 percent in October and is likely to rise again in November, adding to inflation in medical care services.
Motor vehicle maintenance and repair is another area that has driven core inflation, with the index rising 9.6 percent over the last year. With inflation in car parts slowing and wages moderating, we should see much slower inflation in this component going forward.
Car insurance is another important item in this category. The index rose 1.9 percent in October and is up 19.2 percent over the last year. It’s worth noting that the insurance index in the personal consumption expenditure deflator, which uses a net concept (subtracting what is paid out in claims), has been rising far less rapidly in recent months. It has risen by a total of less than 0.3 percent over the last four months. This divergence is explained by the large amounts paid out in claims, often for weather-related events like hurricanes and flooding.
Overall Picture – Further Moderation
The November CPI is likely to continue the pattern of good news we have been seeing about the economy. Inflation is slowing to a pace that allows for healthy real wage growth and is consistent with the Fed’s 2.0 percent target.