After reaching a peak of 9.1% YoY in June 2022, US Consumer Price Index (CPI) slowed over the past few months, falling to 4% YoY in May. Proxies suggest the downward normalization should continue in the short term with CPI still on track to be around 3% YoY in June 2023.
1. US CPI Shelter Growth Hit A Peak In March
Market rents will remain contained in the coming months. Household formation and rental demand are slowing in response to deteriorating macro conditions. In the meantime, housing supply (multifamily) should gain traction, with a peak expected around 4Q23/1Q24. Latest data show mutlifamily units under construction reached a new record high in May 2023. The collision of these factors will probably result in a contraction of market rents on a YoY basis soon.
In the past, the CPI’s measure of rents for homeowners has typically lagged other measures because of data construction. As a result, the Shelter component of the CPI basket, and particularly the Owners’ Equivalent Rent of residences (OER) component, should moderate in the coming months, adding downward pressure on headline inflation. Note that base effects will be particurlarly favorable from August 2023.
2. Food Prices Growth Should Ease Sharply
Proxies also point to a downward normalization of food prices’ growth until at least Q2 2024. Agricultural commodity prices — which are usually leading CPI food prices by 12 months — retraced over the past few months. In addition, fertilizer prices — another leading indicator — are also down ~50% YoY.
3. Core Good Prices Will Keep Easing On a YoY Basis
Since a few months, supply chain disruptions have eased significantly. Several indexes point to a return to normal. According to data from the New York Fed, supply chain pressures experienced a decline in May, which contributed to the alleviation of surging inflation pressures worldwide. The most recent Global Supply Chain Pressure Index from the New York Fed indicated a reading of -1.71, compared to the revised -1.35 observed in April.
In the meantime, wholesalers of finished goods have faced a rebound in inventories due to weak real consumption and will probably keep implementing discounts.
4. Gasoline Prices Have Contributed Negatively Since March 2023
On a YoY basis, gasoline prices have become a drag on CPI YoY headline since March 2023. Base effects reversed significantly (from positive to negative) and should hit a maximum in June 2023. On a non-adjusted basis, US gasoline prices remained almost stable during the first three weeks of June while they skyrocketed last year. As a result, the YoY figures should decline sharply.
5. CPI Services (Less Rent of Shelter) Growth Could Ease Further
There are also signs CPI Services (less rent of shelter) growth could ease further on a YoY basis. This component is more sensitive to the labor market. Wages growth already peaked, reaching the smallest pace since June 2021 in May 2023. Meanwhile, latest data indicated that the rate at which individuals are leaving their jobs has been decreasing, reaching 2.4% in April, which is only slightly higher than the average of 2.3% observed in 2019. As the rate of job resignations approaches its level before the pandemic, workers may discover that they are unable to negotiate larger salary increases from their employers.
6. Market Expectations
In this context, market participants already expect CPI YoY to slow markedly by June 2023 with swaps pointing to a level slightly above 3%. Taking into account upcoming base effects, leading indicators and gasoline futures, it seems that CPI could fall below 3% in 4Q 2023.
About the Author:
Christophe Barraud is Chief Economist and Strategist at Market Securities. He has been awarded by Bloomberg the title of Top Forecaster of the U.S. Economy (from 2012 to 2020 and in 2022), Eurozone Economy (from 2015 to 2019 and in 2022) and Chinese Economy (from 2017 to 2020). He also won the latest Forecaster of the Year contest organized by MarketWatch in 2020. Since 2021, he has been Adjunct Lecturer at ESCP in the MSc Finance, which has been ranked first worldwide in the 2023 Financial Times Masters in Finance ranking.