Inflation: November Big 5 Buckets and Add-Ons

CPI moving parts brought relief from 7.7% to 7.1% on energy relief, used car deflation, and easing health care services.

• Energy relief and slightly better food comps helps at the household level even if double-digit food inflation is still brutal.

• The used car line will get some attention as it shifts into deflation mode, but the adverse move in the Shelter Rental line will remain a debate as payrolls keep rising.

• That leaves the Powell conference as the focal point, and the terminal rate (timing and level) will get fresh speculation.  

Below we detail the Big 5 inflation categories as we see them and update some of the more front burner line items for the typical household. We discussed the breakout of the Big 5 line items in detail last month (see CPI: The Big 5 Buckets and the Add-Ons 11-10-22), and here we just post them for the follow-the-bouncing number approach. We update the YoY unadjusted inflation numbers for each across end-of-quarter numbers from Dec 2020 to June 2022, and then monthly through November 2022. The Big 5 as listed comprise around 75% of the CPI index with the selected add-ons taking on more than 11% on top of that. In other words, it tells the bulk of the story.

We see the favorable trend line for headline CPI from the June 2022 level of 9.1% to the current 7.1% Core CPI weighed in at 6.0%, down from the multi-decade high of 6.6% in September. Energy declines have been a big driver so far and Food has been a relief as it ticks down modestly to 10.6% after peaking in August at 11.4%. Food at Home of 12.0% is still a very ugly number but down from 13.5% in August. 

Among the major moving parts that get a lot of attention as economic headwinds, we see Shelter (with all of its measurement quirks) at highs. The Rental number of 7.9% is still part of a bad news trend. While many will still expect easier rents next year, reconciling that with the massive Jobs Opening numbers and rising payroll is not exactly intuitive (see Jobs Conundrum: Good is Bad, Bad is Good, Jobs and the Fed: JOLTS Gets Heavy Powell Focus). If the newly employed see affordability of new homes squeezed badly by mortgage rates, the question is “Where do they live?” They probably rent.

One notable line item that jumps out in the release is the Used Car Market being in deflation mode. There is no shortage of action in used car markets (See Carvana: Wax Wheels and Market Menagerie: The Used Car Conundrum). The -3.3% line item makes a statement when set against the irrational pricing action in used cars seen as 2021 progressed, peaking at around 45% in June 2021. Elsewhere in Automotive, which in total is a major part of the CPI index when you get into the weeds in the various services lines (see Automotive Inflation: More than Meets the Eye), we see the effects of wage pressures on aftermarket services. That Parts numbers eased, but the Insurance and Maintenance/Repair lines ticked higher.

We see good news in the Medical Services categories in relative terms with the Health Insurance line moving down sequentially from the outsized numbers of the 2022 summer. Health care generally still faces a lot of hiring needs and thus in theory wage pressures that will need to find its way into pricing. Framing the health care lines vs. wage trends is better now with wage inflation, but there is some dispersion within the health care lines that will need to be watched as some of the recent reforms roll in.

The key add-ons showed some YoY inflation upticks in Recreation, Telephone, and Internet. Those numbers do not signal weak consumers although Apparel sliding can be read a number of different ways whether as an inventory issue in the retail sector, a mix shift as consumers tighten belts, some unlocking of the supplier chain, or the strong dollar and offshore edge in purchasing. That is a question for your friendly neighborhood retail analyst in part, but factors such as spot trucking rates for motor carriers could also be easing delivery costs and make the pricing pressure less onerous. The layers of factors get can get pretty complicated to try and tie out in retail markets.