US CPI Review: June 2023 (w/flash July estimates)
As expected, inflation saw a sharp decline in June, with even core services prices now showing clear disinflation.
Executive summary
For June, the US came in as follows:
Headline CPI: 3.0% vs my 3.0% forecast vs 3.1% consensus
Core CPI: 4.8% vs my 4.9% forecast vs 5.0% consensus
CPI adjusted for spot market rent: 0.5% vs my 0.5% forecast
Core CPI adjusted for spot market rent: 1.6% vs my 1.7% forecast
While the CPI continued to decline in June, it wasn’t a result of used car prices, which while decelerating, nevertheless saw another month of strong growth (+1.2%). The lead from the Manheim Index points to negative MoM growth for CPI used car & truck prices in July and August.
As expected, CPI food at home price growth continued to moderate (+4.7% YoY), food away from home prices also saw a 3rd consecutive month of relatively lower MoM growth than was seen in Q1 2023.
CPI energy commodities fell 26.8% YoY as expected. With high prior comparables now almost all cycled, the rate of decline is expected to moderate in 2H23 — I currently expect CPI energy commodities to turn YoY positive in December.
The CPI’s lagging rent based measures continued to see elevated MoM growth in June, though the lead from spot market rents continues to suggest that lower growth lies ahead.
Education & communication services saw the largest monthly decline versus their historical monthly average (across 2010-19) since October 2014.
Motor vehicle maintenance prices reaccelerated MoM after seeing a period of more moderate growth.
Airline fares saw a MAJOR fall in June (-6.5%), which is unusual — the big declines usually come in July and August.
Recreation services and other personal services saw another month of more moderate growth, with evidence now tipping in favour of a downtrend in MoM growth.
Adjusted core services prices continued their recent deceleration in YoY growth, meaning that even the most lagging component of the price cycle is now seeing clear disinflation.
My flash (i.e. provisional & subject to change) YoY CPI estimates for July are as follows:
CPI: 3.1% vs 3.0% in June
Core CPI: 4.6% vs 4.8% in June
CPI adjusted for spot market rents: 0.4% vs 0.5% in June
Core CPI adjusted for spot market rents: 1.2% vs 1.6% in June
Inflation comes in largely as I had forecast
As shown in the table below, US CPI inflation came in largely as I had forecast for June:
June’s decline in the annual rate of growth in the CPI marked the 12th consecutive month of moderating CPI growth. On a spot market rent adjusted basis, the CPI is now closer to outright deflation, than it is to high inflation.
June also marked the first time since February 2021 that both headline and core CPI inflation were below 2% YoY on a spot market rent adjusted basis.
Let’s now unravel the details and conclude with my flash US CPI estimates for July!
Used car prices rise by more than expected, but big falls are still likely over the months ahead
Beginning with used car prices, while MoM growth moderated in June from the very high levels that were seen in April and May, at 1.2%, June’s growth was nevertheless still high.
This compares to a 2-month lag of the Manheim Used Vehicle Value Index, which suggested growth of just 0.1% — should the much larger increase be a concern? No.
It’s normal for CPI used car & truck prices to deviate from a simple 2-month lag of the Manheim Index (either upward or downward).
Therefore while June’s increase was more than a 2-month lag of the Manheim Index suggested, next month, it could be lower.
Remember, while the Manheim Index is a good indicator of where CPI used car & truck prices will head, it’s not a granularly precise correlation.
What does the Manheim Index suggests lies ahead for CPI used car & truck prices? BIG declines. A 2-month lag of the Manheim Index points to monthly price DECLINES of 1.7% and 3.8% in July and August respectively.
Food at home prices moderate as expected, more positive signs also seen with food away from home prices
As expected, CPI food at home price growth continued to see a significant moderation on an annual basis, with the YoY growth rate falling to 4.7%. This comes on the back of consistent monthly declines in underlying food commodity prices, as measured by the UN FAO Food Price Index.
Food away from home prices, which are more exposed to lagging services prices and have thus been continuing to record elevated MoM growth, saw a third consecutive month of somewhat more moderate monthly growth. Over the past 3-months, MoM growth has on average, been 0.2% above the average change recorded for the respective month across 2010-19. This compares to 0.4% in Q1 2023.
While still consistently above historical averages, the recent trend thus suggests that food away from home price growth is beginning to moderate.
CPI energy commodities move as expected
Meanwhile, CPI energy commodities increased by 0.5% MoM, taking the annual decline to 26.8%, which was expected.
Though with high prior comparables now largely cycled, I expect that the annual decline will begin to moderate significantly over the months ahead. I currently expect that the CPI energy commodities index will turn YoY positive by the end of the year.
Rent based measures continue to remain elevated as the MoM deceleration pauses, but further moderation still expected
The monthly change in the CPI’s rent based indexes remained at elevated levels in June, with the MoM moderation stalling post the major MoM deceleration that was seen in March.
Given the way in which the CPI’s rent based indexes are calculated, the move back to more modest growth rates was likely to always be gradual, as only a small portion of the rental sample have their prices reviewed in a given month. This means that in addition to being lagging, the index is also smoothed.
As a result, the difference between spot market rents, and the lagging CPI rent based measures, continues to be extreme. It could be another year before owners’ equivalent rent (OER) and rent of primary residence (RPR) begin to see YoY growth that more accurately reflects the underlying change in spot market rents.
Education & communication services sees the largest monthly decline versus its historical average since October 2014
June saw another big drop in CPI education & communication services prices, which fell 0.2%. Compared to the historical average change (across 2010-19) for the relevant month, this was the largest negative deviation seen since October 2014!
June’s large fall was driven by a large decline in telephone services prices, which fell 1.2% MoM.
Motor vehicle maintenance surges again, while motor vehicle insurance stays hot
After seeing more moderate MoM growth across February to May versus what was seen from June 2022 to January 2023, CPI motor vehicle maintenance prices once again surged, rising by 1.3% in June. This was the largest monthly increase since September 2022.
Meanwhile, CPI motor vehicle insurance prices continue to see very high MoM growth, rising by 1.4% in June. YoY growth stands at 16.9%.
This CPI component continues to show no signs of disinflation.
Airfares put significant downward pressure on the CPI in June — is it a pull forward, or are more BIG declines in store?
In contrast to the large increases in motor vehicle related metrics, airfare prices saw a HUGE decline in June, falling 6.5%.
While this is a volatile category, airline fares tend be relatively flat in June. Large declines are instead usually seen in July and August.
The large decline in June means that the change in airfares has moved well below levels that are typical for this time of the year. The key question for the CPI, is whether this represents a significant pull forward of the declines that are typically seen in July and August, or if it is instead signalling further big declines ahead.
Recreation services and other personal services provide additional disinflation signals
In my June US CPI preview, I noted that a key thing to watch would be the categories of recreation services and other personal services, with both categories having shown an unclear trend over the past three months, with two months of negative/more moderate price growth seen amidst one month of high monthly price growth.
For both categories, the latest CPI data provided important additional insights, and in both cases, it indicated a trend that is shifting to more moderate price growth.
Beginning firstly with recreation services prices, while June saw growth that was above its historical average, it was only modestly so (0.1%), which is not unusual or alarming. With three of the last four months now seeing much more modest growth, indications are growing that MoM growth could now be returning back towards its historical average.
Meanwhile, other personal services prices saw MoM growth that was BELOW its historical average for June. This was the first time that MoM growth has been below its historical average since December 2022. As is the case with recreation services, with three of the last four months seeing more modest MoM growth, it appears that the MoM growth in other personal services could now also be decelerating.
Looking at things on a broader basis, overall adjusted core services prices have been disinflating
After taking out lagging shelter, as well as the indirectly measured health insurance component (which is contributing to significantly LOWER services prices), the annual growth rate of core services prices, being the most lagging key component of the price cycle, have clearly begun to move lower after peaking in February.
Flash July US CPI Estimates — more declines broadly expected
After reviewing June’s US CPI data, my flash (i.e. provisional) CPI estimates for July expect an increase in the annual rate of CPI inflation, from 3.0% in June, to 3.1% in July. This would mark the first increase in the annual growth rate of the CPI since June 2022.
Though again, one needs to remember the impact of lagging rents. Once the CPI is adjusted for spot market rents (using Apartment List data), my flash CPI forecast for July expects another REDUCTION, from 0.5% to 0.4% — this would mark the 16th consecutive reduction in the YoY growth rate!
For the core CPI, I currently expect another decline, with my flash estimate for July at 4.6%, down from 4.8% in July.
Once an adjustment is made for spot market rents, I currently expect the core CPI to see major additional moderation, falling from 1.6% in June, to just 1.2% in July.
All in all, July is currently expected to see another month of broadly positive data on the inflation front, with the CPI adjusted for spot market rents, core CPI adjusted for spot market rents, and the unadjusted core CPI, all currently expected to record a further moderation in their annual growth rates.
The Fed’s failure to focus on spot market rent adjusted CPI inflation (which provides a much better measure of CURRENT inflation pressures, and is showing that the US is closer to deflation than it is to high inflation), means that it greatly increases the odds of pushing the US economy from one extreme (high inflation), to another (a deflationary bust).
While the Fed may be ignoring the clear evidence that spot market rent adjusted CPI data is providing, it doesn’t mean that you have to do the same. Getting a firm grasp of the real underlying rate of inflation, and its key driver (being the money supply), can allow you to get ahead, just as it did back in 2020/21, when the Fed ignored the surge in the M2 money supply and dismissed inflation concerns.
Though even with its focus on the lagging core CPI and core services prices, with the core CPI currently expected to see another decline in its annual growth rate in July, taking it even further below the current federal funds rate (let alone another expected hike in just over a week’s time), that may finally be enough to convince the Fed to stop hiking rates further.
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Thanks for the analysis! :-)