Beneath Skin of CPI Inflation: Stunning Outlier Services CPI Drove Down Everything Else

Thx4Stock Services are big, and that one-month outlier was massive, and it drove down Core CPI and overall CPI. The Consumer Price Index for May, on a month-to-month basis, was pushed down by the continued sharp drop in durable goods prices, a drop in energy prices, flat food prices, and “core services” prices that rose at the smallest pace since late 2021 in a stunning whiplash-inducing outlier move, according to data from the Bureau of Labor Statistics today. So, we’ll start with that outlier because it’s so big and because core services are so big — they account for 65% of total CPI — and because that outlier drove everything else. Stunning outlier: Core services CPI increased by 2.7% annualized in May from April (0.22% not annualized), the smallest increase since October 2021 (blue line). These kinds of outliers don’t make a trend; they’re soon reversed, as all other outliers in core services have shown. This massive one-month outlier drove down the six-month reading. The six-month core services CPI rose by 5.5% annualized, the first deceleration since October 2023 (red). Month-To-Month Core CPI, Driven Down By Outlier In Services Core CPI rose by 2.0% annualized (0.163% not annualized) in May from April, the smallest increase since August 2021 (blue line in the chart below). The month-to-month squiggles can be wild, and this one was driven by the whiplash-inducing outlier in core services CPI. The six-month core CPI, which irons out most of the month-to-month zigzags, rose by 3.7% annualized, the first deceleration, after five months of accelerations in a row. Year-Over-Year CPI Measures, Summary: Core services CPI increased by 5.2% year-over-year in May, roughly the same hot pace for the eighth month in a row (red line). Durable goods CPI – after the spike during the pandemic – has been falling across the board since mid-2022, led by the plunge in used-vehicle prices. In May, durable goods CPI was down 3.8% year-over-year, the biggest drop in 20 years (green). Core CPI, which excludes food and energy, rose by 3.4% year-over-year, continuing its deceleration, slowed by the sharp drop in durable goods (blue). Overall CPI rose by 3.3% year-over-year. It has been in essentially the same narrow range since June 2023 when it hit the cycle-low of 3.0% (yellow): The Housing Components Of Core Services CPI Rent of Primary Residence CPI rose by 4.8% annualized in May from April, an acceleration from the prior month (blue). The three-month reading rose by 4.7%, the smallest increase since October 2021. The Rent CPI accounts for 7.6% of overall CPI. It is based on rents that tenants actually paid, not on asking rents of advertised units for rent. The survey follows the same large group of rental houses and apartments over time and tracks the rents that the current tenants actually paid in these units. The Owners’ Equivalent of Rent CPI rose by 5.3% annualized in May from April, an acceleration from the prior month. It remains in the range of which August 2023 had been the low point (+5.1%). The three-month OER CPI also rose by 5.3% annualized, roughly the same as in the prior month. The OER index accounts for 26.6% of overall CPI. It is designed to estimate inflation of “shelter” as a service for homeowners – as a stand-in for the services that homeowners pay for, such as interest, homeowner’s insurance, HOA fees, maintenance, and property taxes. As an approximation, it is based on what a large group of homeowners estimates their home would rent for, the assumption being that a homeowner would want to recoup cost increases by raising the rent. “Asking rents…” The Zillow Observed Rent Index (ZORI) and other private-sector rent indices track “asking rents,” which are advertised rents of vacant units on the market. Because rentals don’t turn over that much, the ZORI’s spike in 2021 through mid-2022 never fully translated into the CPI indices because not many people actually ended up paying those asking rents. The ZORI rose by 0.2% in May from April, seasonally adjusted, and by 3.4% year-over-year. The chart shows the CPI Rent of Primary Residence (blue, left scale) as index value, not percentage change; and the ZORI in dollars (red, right scale). The left and right axes are set so that they both increase each by 55% from January 2017. The ZORI was up by 49% from January 2017, and the CPI Rent was up by 38% over the same period. Rent inflation vs. home-price inflation: The red line in the chart below represents the CPI for Rent of Primary Residence (actual rents paid by tenants) as index value. The purple line represents the Case-Shiller 20-Cities Home Price Index (see our “Most Splendid Housing Bubbles in America”). Both indexes are set to 100 for January 2000: Services Related To Motor Vehicles Motor vehicle insurance costs have soared during the pandemic largely because used-vehicle prices have spiked, which translates into higher replacement costs. And motor vehicle maintenance costs have surged because wages of auto-repair technicians have surged, and because prices of replacement parts have surged. But that spike during the pandemic seems to be backing off at the moment. Motor vehicle insurance CPI: In May from April annualized: -1.4% Three-month annualized: +18.3% Year-over-year: +20.3% Since January 2022: +46% Motor vehicle maintenance CPI In May from April annualized: +3.3% Three-month annualized: +8.3% Year-over-year: +7.2% Since January 2020: +35% Food away from Home CPI – often called food services – includes full-service and limited-service meals and snacks served away from home, food at cafeterias in schools and work sites, food served at stalls, etc. In May from April annualized: +4.3% Year-over-year: +4.0% Since January 2020: +27% Major Services ex. Energy Services Weight in CPI MoM YoY Core Services 64% 0.2% 5.2% Owner’s equivalent of rent 26.6% 0.4% 5.7% Rent of primary residence 7.6% 0.4% 5.3% Medical care services & insurance 6.5% 0.3% 3.1% Food services (food away from home) 5.3% 0.4% 4.0% Education and communication services 5.0% 0.4% 2.9% Motor vehicle insurance 2.9% -0.1% 20.3% Admission, movies, concerts, sports events, club memberships 1.8% 0.3% 4.7% Other personal services (dry-cleaning, haircuts, legal services…) 1.5% -0.3% 4.1% Lodging away from home, incl Hotels, motels 1.5% -0.1% -1.4% Motor vehicle maintenance & repair 1.2% 0.3% 7.2% Public transportation (airline fares, etc.) 1.1% -3.1% -4.7% Water, sewer, trash collection services 1.1% 0.1% 4.8% Video and audio services, cable, streaming 0.9% -1.3% 2.8% Pet services, including veterinary 0.4% 0.4% 5.9% Tenants’ & Household insurance 0.4% 0.5% 4.3% Car and truck rental 0.1% -1.2% -8.8% Postage & delivery services 0.1% 0.3% 3.8% Click to enlarge Core services price level. Since January 2020, the core services CPI has increased by 21%. The steepness of the curve indicates the rate of inflation. Durable Goods CPI The durable goods CPI fell by 5.6% annualized (-0.48% not annualized) in May from April, and by 3.8% year-over-year, as overall price declines accelerated, except in used vehicles. New and used vehicles dominate this index, which also includes information technology products (computers, smartphones, home network equipment, etc.), appliances, furniture, fixtures, etc. All categories have been experiencing price declines starting in late 2022, after the ridiculous price spike during the pandemic. From January 2020 to the peak in August 2022, durable goods prices spiked by 23%. Since then, they have dropped by 5%, having unwound only one-quarter of the pandemic spike. Compared to January 2020, the index is still up 18%. Major durable goods categories MoM YoY Durable goods overall -0.5% -3.8% New vehicles -0.5% -0.8% Used vehicles 0.6% -9.3% Information technology (computers, smartphones, etc.) -1.9% -8.1% Sporting goods (bicycles, equipment, etc.) -0.3% -0.3% Household furnishings (furniture, appliances, floor coverings, tools) 0.0% -2.5% Click to enlarge New vehicles CPI fell 5.8% annualized in May from April (-0.49% not annualized), the fifth month-to-month decline in a row, and the steepest yet. Year-over-year, the index fell by 0.8%. After a long plateau, prices are now finally heading south, as inventories of new vehicles have built up into what amounts to a glut at many dealers, and automakers are having to offer big incentives and discounts to sell the vehicles. In the years before the pandemic, the new vehicle CPI zigzagged along a flat line, though vehicles were getting more expensive. This is the effect of “hedonic quality adjustments” applied to the CPIs for new and used vehicles and other products (detailed explanation of hedonic quality adjustments in the CPI). Used vehicle CPI rose by 7.5% annualized in May from April (+0.60% not annualized), seasonally adjusted (red); not seasonally adjusted (blue), the index rose by 5.8% annualized (+0.47% no annualized). These price increases in May diverge from wholesale prices that continued to drop in May. Used vehicle CPI has now given up a big portion of the 53% spike from January 2020 through January 2022, but is still 30% higher than in January 2020. Food Inflation Inflation of “Food at home” – food purchased at stores and markets and eaten off-premises – has cooled, with no increase in May from April, and a 1.0% increase year-over-year, after the massive spike during the pandemic. MoM YoY Food at home 0.0% 1.0% Cereals, breads, bakery products 0.2% 0.7% Beef and veal -0.3% 5.7% Pork 0.9% 2.6% Poultry 0.4% 1.2% Fish and seafood -0.5% -1.0% Eggs -0.4% 3.0% Dairy and related products -0.5% -1.0% Fresh fruits 0.4% -0.2% Fresh vegetables -0.4% 0.8% Juices and nonalcoholic drinks -0.5% 2.0% Coffee, tea, etc. -0.6% -2.5% Fats and oils -0.3% 2.2% Baby food & formula -1.3% 2.5% Alcoholic beverages at home 0.2% 1.4% Click to enlarge The CPI for food at home, after the pandemic spike, is up 25% from January 2020. Prices have flattened out, but have not come down. Energy The CPI for energy covers energy products and services that consumers buy and pay for directly: CPI for Energy, by Category MoM YoY Overall Energy CPI -2.0% 3.7% Gasoline -3.6% 2.2% Electricity service -0.2% 4.7% Utility natural gas to home -0.8% 0.2% Heating oil, propane, kerosene, firewood -1.0% 2.8% Click to enlarge Gasoline prices (account for about half of the energy price index) are very seasonal, with the lowest prices in December or January and the highest prices during driving-season in the summer. Seasonally adjusted prices (red) and not seasonally adjusted prices (blue) declined in May from April: Original Post Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.