False Hopes of Peak CPI Inflation: Prices of Services, Housing, Food, Fuel Spike. Dollar’s Purchasing Power Goes WHOOSH.
by Wolf Richter, Wolf Street:
The Fed is going to have a field day with its rate hikes.
Raging inflation. The costs of services continued to spike in May, which has been the thing to watch for months because it’s where consumers spend most of their money, and it’s unrelated to “transitory” spikes in commodities. This is where inflation is getting entrenched and will be hard and painful to dislodge, and it’s now front and center. Costs of gasoline and natural gas blew out; the cost of food spiked by over 10%, while inflation in used vehicles resumed their spike, after three months of declines, and new vehicle prices continued to surge.
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I said a few days ago, while observing the reinvigorated spike in gasoline and diesel prices, “Inflation not in the mood of peaking yet,” and that’s what we’re seeing, but for reasons beyond gasoline.
The headline Consumer Price Index (CPI-U), released today by the Bureau of Labor Statistics, spiked on a month-to-month basis by 1.0% in May, the worst red-hot month-to-month spike in this entire red-hot inflation cycle, with no sign of peaking. Year-over-year, CPI spiked by 8.6%, the worst since 1981. And the Fed is going to have a field day with its rate hikes:
CPI-W, which tracks inflation for “all urban wage earners & clerical workers,” and whose third-quarter average is used to adjust the COLAs for Social Security in the following year, spiked by 9.3% in May.
In the basket of goods and services that is used for CPI, there are always some items that decline or remain stable, and other items that move higher, and they all have different weights in the CPI, with housing costs accounting for about one-third of CPI, and some items may go down one month, but others may surge, and the whole thing gets compared to levels a year ago, which throws the “base effect” into the mix, and so the year-over-year CPI rates are never a straight line, but move up and down and offer many instances of false hopes. But in this inflation cycle, we had a nearly straight line higher, interrupted only by two events of false hopes: this April and the summer of 2021.
For people who spend all their money on necessities – such as rent, food, gasoline, utilities, and health insurance – inflation is a lot worse than CPI, because this basket of goods and services tracks more closely the spending by the big spenders.
Purchasing Power of the dollar goes WHOOSH.
The CPI tracks the loss of the purchasing power of the consumer’s dollar, and thereby the purchasing power of labor. In May, the purchasing power of $100 in January 2000 dropped to $57.80, and this is why this raging inflation has put Americans in a very sour mood:
CPI inflation in services spikes.
The CPI for services spiked by 0.8% from the prior month (close to 10% annual rate!), and by 5.7% from a year ago, the worst since 1990. And this is just relentless — and it is why the Fed is going to have a field day with its rate hikes:
Services include housing costs, which we’ll get to in detail because that’s its own disaster in the making. And it includes other items, most prominently these (year-to-year % change):
- Health insurance: +13.8%
- Airline fares, summer special: +37.8%
- Lodging in hotels and motels, summer special: +22.2%
- Delivery services: +16.4%
- Laundry and dry-cleaning services: +10.1%
- Car and truck rental spiked month-to-month by 1.7%, but year-over-year was down from the crazy spike last year: -0.4%
The CPI for housing spikes, but with a lag.
The CPI for “shelter” accounts for 32.4% of total CPI and is the largest component. It’s designed to reflect housing costs as a service (not as an asset to be purchased). The largest components within this basket are “Rent of primary residence” (7.3% of total CPI) and “Owner’s equivalent rent of residence” (23.8% of total CPI).
“Rent of primary residence” jumped by 0.6% for the month and by 5.2% year-over-year (red in the chart below). It measures what a very large panel of tenants reported as the change in their actual rent payments over time, including in rent-controlled apartments.
“Owner’s equivalent rent of residences” jumped by 0.6% for the month and by 5.1% year-over-year (green line). It measures the costs of homeownership as a service, based on what a very large panel of homeowners report that their home would rent for.
Both measures are still below the overall CPI and therefor are still holding down CPI, but each month, they’re holding it down less than in the prior month, and they will come into full bloom later this year:
CPI for housing costs v. Asking Rents v. Home Prices.
CPI rent measures track rent increases that are actually experienced by tenants that have been renting these apartments and houses for a while.
“Asking rents” track advertised rents of vacant apartments and houses listed for rent. They’re a measure of what landlords want for their apartments and houses that they have listed for rent. They do not reflect actual rents paid by tenants. But they show where the market is.
The Zillow Rent Index has shot up, starting in the summer of 2021 as it was coming out of the Pandemic trough. On a year-over-year basis, it jumped 16.4% in May. The year-over-year increase is down slightly from prior months. But on a month-to-month basis, the index jumped 1.0% in April, the latest data available, up from the 0.8% increase in March.
But it takes a while for asking rents to become actual rents that tenants are paying, and it takes a while longer for these higher rents to get picked up by the CPI panel of tenants when their lease expires and when they get actual rent increases.
You can see this lag in the chart below. The “rent of primary residence” (purple) and the “owner’s equivalent rent” (green) are in the process of catching up with the Zillow Rent Index (red line), and will continue to rise, even if the asking rents, tracked by Zillow, back off over the next 12 months. In other words, the CPI housing components that account for nearly one-third of CPI will fuel CPI inflation well into 2023 (my discussion of this phenomenon):
The cost of buying a house spiked by 20.6% year-over-year in the January through March period, according to the latest Case-Shiller Home Price Index (purple line below). I document this raging mania in The Most Splendid Housing Bubbles in America.
But the CPI doesn’t measure the cost of purchasing a house as an asset; it attempts to measure the cost of the service that a home provides – shelter – via its “owner’s equivalent or rent” (red). Both indices are set to 100 for January 2000:
CPI, nondurable goods.
The CPI for nondurable goods is dominated by food, gasoline, utilities, and household supplies. After having risen only 0.3% month-to-month in April for another moment of false hopes, it spiked by 2.1% in May from April, and by 14.3% year-over-year, the worst spike since April 1980:
“Food at home” CPI spiked by 1.2% for the month and by 10.1% year-over-year. In some categories, such as beef, price increases, while still red hot, backed off a tad. In other categories, such as poultry and fish, price increases worsened.
