US Inflation: 4 Takes

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US Inflation: 4 Takes

We’ll dedicate today’s Data section to the Consumer Price Index report out this morning as well as related topics regarding US inflation.

Four points:

#1: CPI inflation remains concentrated in two categories – gasoline and new/used motor vehicles – that either have easy comparisons to last year (the former) or are a function of supply chain disruptions (the latter, due to chip shortages):

  • Headline August CPI Inflation: +5.3 percent versus last year
    Contribution from higher gas prices: +1.6 points
    Contribution from higher used vehicle prices: +1.1 points
    Contribution from higher new vehicle prices: +0.3 point

    Headline inflation ex-gasoline and new/used vehicles: +2.3 percent versus last year
  • Core (ex-food and energy) August CPI inflation: 4.0 percent versus last year
    Contribution from higher used vehicle prices: +1.4 points
    Contribution from higher new vehicle prices: +0.4 points

    Core inflation less new/used vehicle prices: +2.2 percent versus last year

Takeaway: gasoline and vehicle inflation have been problems for many months now, but that’s not the same thing as structural inflation. Excluding those 2 categories, US CPI inflation has been in the low-2 percent range this year and todays’ August inflation report is no different.

#2: Food inflation has been getting more attention of late, and the August CPI report shows this is a valid concern. Over the last 3 months, annual US food inflation has gone from +2.2 percent to +3.7 percent. And, unlike gas or new/used vehicles, we cannot point to easy 2020 comps as the reason for increasing inflation pressures. Last August, food inflation was running +4.1 percent. That means that over the last 2 years US food prices have risen by 8 percent.

Rising prices for common proteins – meats, poultry, fish, and eggs – have historically been the key drivers of overall food inflation, and as this chart shows they are playing that role again now.

  • The dark black line is CPI food inflation, the red line is protein inflation, and the time series here goes back to 2000.
  • Current protein inflation is 8.0 percent annually, and along with August 2020’s reading of 7.1 percent, this means 2-year inflation is running 16 percent for this category.
  • While protein inflation is volatile, the usual pattern is a sudden lift (2004, 2011, 2014) followed by a subsequent decline. We’ve had 2 increases in the recent past (2020, 2021), but no decline as of yet.

Takeaway: anyone who went food shopping in the 1970s knows how powerful protein/food inflation can be to consumer psychology. As much as we can easily disarm the “structural inflation” argument (Point #1 above), higher food prices do worry us because of their influence on inflation expectations.

#3: Shelter costs – both “Owners’ Equivalent Rent” and “Rent of primary residence” – are the other much-discussed current inflation topic. Combined, they make up 31 percent of headline CPI inflation and 39 percent of core CPI inflation.

While neither OER (blue line in the chart below) or Rent (red line) inflation in August were anything close to private sector measures of shelter inflation, they are rising on a sequential basis as we go through 2021. The trough was back in March 2021, at 1.8 – 2.0 percent annualized inflation. As noted in the highlight box, August Rent/OER inflation was 2.1 – 2.6 percent. This graph goes back to 2011 to show that OER/Rent inflation still has some way to go before it returns to normal (3 – 4 pct).

Takeaway: Shelter inflation should continue to increase over the next year and history says it should get back to 3 – 4 percent (where it was pre-pandemic). If the rest of the CPI is still running +2 percent annual inflation when that occurs, then headline inflation will be over 3 percent (just based on the weightings math). No doubt that the Federal Reserve knows this math, so their bet must be that non-Shelter inflation will in fact decline between now and 2022 – 2023. We agree with that, but recognize this is going to seem like a pretty even horse race over the next 12 months.

#4: US Google searches for “cheap”, “discount” and “promo code” as a measure of American consumers’ inflation concerns. The chart below shows the Google Trends search volume data for each back to the start of 2020. One would think that increasing consumer concerns about higher prices would generate more online bargain hunting. One would, apparently, be wrong however, because none of these search terms is showing any momentum just now.

Takeaway: as much as Americans are reporting higher inflation expectations (as described in yesterday’s NY Fed survey, which we discussed), they are not yet noticeably altering their shopping habits to offset the effect of higher prices. To be fair, the same thing happened in the 1970s. It took some time for coupon-clipping to become the norm back then, but once it caught on no one went shopping without scouring the local newspapers’ ad circulars first. We’ll keep monitoring the Google Trends data for the terms above as a sign that shift in consumer psychology has started.