Core CPI Hasn't Improved For 7 Months, Stuck At 2.5x Fed Target; Services CPI Accelerates

The “Core” CPI has shown no change in direction for seven months, running at an annualized increase of just above 5%: two and a half times the Fed’s 2% target, and it has gotten stuck there. That’s a problem Powell has been talking about for months, and it’s just not changing. This is “sticky inflation.”

On a month-to-month basis, core CPI, which excludes the volatile food and energy products, rose by 0.44% in May from April, the second month in a row of acceleration, according to data by the Bureau of Labor Statistics today. It has been in the same range for the past seven months, which makes for an annualized rate of just over 5% (red line in the chart below).

The three-month moving average of core CPI smoothens out the monthly ups and downs. It passed through a low point in December and has since then been above it, with the last three months essentially unchanged at 0.42%, a hair above where it had been in November (blue).

On a year-over-year basis, core CPI jumped by 5.3% in May from April, a slight deceleration from the prior months (in the 5.4-5.6% range) and approaching the annualized month-to-month rates over the past seven months of just above 5%:

The overall Consumer Price Index (CPI) for April, rose by 4.0% year-over-year and edged up by only 0.1% in May from April, and that’s welcome news, but it’s a mirage produced by a plunge in energy prices (they won’t plunge forever), stalling food and new vehicle prices, and the infamous “health insurance adjustment” that has been running now for eight months, but will end with September. It has now turned the raging medical care services index negative!

Energy prices plunged and pulled down overall CPI.

Core Services inflation (without energy services) accelerated in May from April to 0.4% (red line). The three-month average (blue line) also came in at 0.4%, so that’s just under 5% annualized, despite the massive “health insurance adjustment” that has been understating medical care services since October. This adjustment will end in September, and then it may, as it usually does, swing in the opposite direction (more in a moment). Nearly two-thirds of consumer spending goes into services:

Year-over-year, the services CPI jumped by 6.6%, compared to 6.8% in April. February had marked a 40-year record of 7.3%:

Health insurance mega-adjustment understates CPI, core CPI, services CPI, and Medical Services CPI through September and has now turned Medical Services CPI negative for the month and the year!

BLS undertakes annual adjustments in how it estimates the costs of health insurance and then spreads those adjustments over the following 12 months. Normally, this isn’t a big deal, but for the 12 months through September 2022, CPI massively overstated health insurance inflation (+28% yoy in September 2022). That overstatement has been adjusted away every month since October 2022 (more here), and this will continue through September 2023.

Then there will be a new adjustment, and in the past, they tended to swing in the opposite direction, as you can see in the chart below.

The Fed’s favored inflation measure, the PCE price index collects health insurance inflation via a different method and doesn’t suffer these adjustments.

The CPI for housing as a service.

The CPI for housing as a service is based on rent factors, primarily “Rent of primary residence” (weight: 7.5% of total CPI) and “Owners' equivalent rent of residences” or OER (weight: 25.4% of total CPI).

“Rent of primary residence” +0.5% for May, +8.7% year-over-year (red in the chart below). Over the past three months, the monthly increases have been at 0.5% each time, making for an annualized increase of over 6%, matching what the largest landlords have been saying in recent months, that they’re now getting over 6% rent increases on renewals and new lease signings.

It tracks actual rents paid by tenants in houses and apartments. The survey follows the same large group of housing units over time and tracks what tenants, who come and go, are actually paying in these units.

Owners’ equivalent rent +0.5% for May, +8.0% year-over-year, down a hair from April, which had been the worst in the data (green) and roughly the same red-hot for the past four months' record levels. This is based on what a large group of homeowners estimates their home would rent for.

OER Versus “asking rents.” Private sector rent indices, such as the Zillow Observed Rent Index (ZORI), track “asking rents,” which are advertised rents of vacant units on the market. The ZORI experienced a double-digit spike in 2021 through mid-2022 that never fully made it into the CPI indices because rentals don’t turn over that much, and proportionately not many people actually ended up paying those spiking asking rents.

In late 2022, asking rents began to actually dip, and there was a lot of chatter about that bringing down rents, and then they stopped dipping, and this year the ZORI rose again and in April and May hit new records.

The chart below shows the OER (green, left scale) as index values, not percent change; and the ZORI (red, right scale) as index value, expressed in dollars.

I set the left and right axes to increase each by 50% to keep the proportional increase of both lines in sync, with the ZORI up by 45% since 2017 and the OER up by 30%.

The ZORI accelerated far faster in 2021 and into late 2022 than the OER, then it briefly dipped, but in 2023, it reaccelerated. Over the past two months, it increased 0.6% each month, faster than the OER.

In terms of future inflationary pressures buried in asking rents, this is kind of a worrisome chart; it shows that inflation pressures are building up again in asking rents:

Rent inflation compared to home price inflation: The Case-Shiller Home Price Index peaked with the report named “June,” then declined. Over the last two readings, the index ticked up. You can see similar increases in the spring of other years, except during the big blast in 2020-2022. Even during the last four years of the Housing Bust (2008-2012), there were these seasonal upticks (purple line).

The red line represents “owners' equivalent rent of residence.” Both lines are index values, not percent changes of index values:

Durable goods inflation rises as used vehicle prices re-spike.

Used vehicles CPI spiked by 9% in two months: +4.4% in May from April, and +4.4% in April from March! A magnificent display of the game inflation Whac A Mole; just after you thought you had it knocked down, it pops back up. The two-month spike reduced the year-over-year drop to 4.2%.

This chart shows the index values, not the percentage change. It is starting to be a mind-boggling chart, and very worrisome:

New vehicle CPI dipped for the second month in a row, -0.1% in May, amid growing supply, sky-high prices, higher incentives, promo interest rates by automakers, and big price cuts by Tesla and other EV makers, undoing just a tiny portion of the ridiculous surge in prices and addendum stickers over the past two years.

Food inflation.

The CPI for “food at home” - food bought at stores and markets - inched up by 0.1% in May from April, after tiny dips in the prior two months. Over the past four months, it has essentially flattened out, after a huge spike.

Year-over-year, the CPI for food at home rose by 5.8%, the least-hot increase since October 2021.

The chart of the index values (not percentage change) shows the huge surge through August last year. Since February 2020, the index has spiked by 23.5%. Food inflation hits the lower-income population much harder as they spend a bigger portion of their income on food.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.