Though the "headline" and "core" index figures are still too high, the mechanics of today's April CPI price inflation report were very encouraging. Let's take a look.
CPI for all items (including food and energy) rose 0.3% in April, after rising 0.4% in each of the last two months. This was slightly better than expectations of a 0.4% increase. Core CPI (which excludes the volatile food and energy categories) rose 0.3% this month, which was about in-line with expectations, though perhaps slightly better. On a year-over-year basis, total CPI increased 3.4% in April, while core increased 3.6%. As shown in the table below, this was slightly better than last month in both cases.
What was more encouraging about the CPI report was the components of how we got there. Goods this month contributed -2 bps to our +30 bps monthly figure, compared to last month's -4 bps contribution. Besides February's +2 bps contribution, goods prices have been a tailwind to inflation in 10 of the last 11 months (so said differently, goods prices are generally declining, and are consequently bringing overall inflation lower). Apparel prices were the biggest headwind to goods inflation this month, adding +4 bps to April's report (this is after adding +2 bps in both the February and March reports). This is somewhat notable considering apparel has generally been about a net zero contributor historically. In contrast, used cars and trucks again helped lower the goods number by -3 bps (similar to last month), while new car prices were a -2 bps tailwind as well. Car prices have remained weak in the market, and given where rates are for auto loans (see below), we may be able to expect at least a little more help here in coming months. But even if these two generally non-inflationary categories offset, we're basically back at zero, which is what goods were regularly contributing to monthly CPI reports before COVID. So that's all generally encouraging.
Services Ex. Shelter (aka "Core Services" or "Super Core") was probably the biggest bright spot of the report, and contributed +14 bps this month. Importantly though, 7 of the 14 bps was again due to car insurance (this was lower than last month's 9 bps, but 7 bps is still quite elevated compared to the pre-COVID monthly contribution level of about zero). Backing out car insurance therefore put the "super core" at about 8 bps (rounding accounts for the other 1 bp here). This was the lowest level since last December, and generally in-line with the pre-COVID average of 7 bps. Lastly, shelter inflation was +18 bps this month, in-line with each of the last two months. This remains elevated versus the pre-COVID average of +11, but it feels like there may finally be some downward pressure on the CPI formula that can move this line item lower in coming months. As readers of these monthly reports know, however, calling when that will happen has been a fool's errand, so we won't hold our breath there.
Also encouraging this month was looking at category level inflation. As a reminder, we usually analyze this topic by looking at what I call "Category 4" or "Category 5" level data, which consists of baskets of goods and services that make up about 98% and 77% of the core CPI respectively. If you want to look at the data yourself, here's the link (click on the XLSX link for Table 2). Similar to last month, this month's median and average price increases across categories was 0.10% and 0.12% for Category 4 (a basket of 55 goods and services that makes up 98% of core CPI), and 0.10% and 0.12% also for Category 5 (a basket of 101 goods and services that makes up about 77% of core CPI). Below are charts showing the trends for these figures in recent months. The reason we look at this is to try and get a sense of inflationary breadth. If more categories of goods and services are inflating at levels above 2%, then that's going to make our job harder to return to that level more broadly. But if fewer categories are inflating faster than 2%, then we've got a better shot at it. 0.10% and 0.12% are each more than low enough to be consistent with 2% inflation. Notice the lines are again below the bars, which indicates several categories with larger weightings are juicing the index higher. We know the biggest of these is shelter.
Now here's the 3 month annualized chart.
To summarize then, if you take our 30 bps unrounded figure, and subtract out the 7 bps "excess" contribution from car insurance, and we're at about 0.23% for the month, and that includes an elevated shelter contribution as well. 0.23% annualized (which equates to about 2.76%) is probably close enough to the Fed's 2% target that they could probably start to lower interest rates soon. But because this is just one month of good data, we'll likely need to see more before that happens. Make sure to check back next month to see if we take another step in the right direction.
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