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CPI: OER Acceleration Begins

November 10, 2021
Bottom Line:  Core CPI rose more than expected in October as Owner's Equivalent Rent (OER), a key measure of shelter prices and nearly a third of core CPI, accelerated while pandemic-related categories remained firm. OER historically lags home price moves by over a year, and the acceleration should last until the 2nd Quarter of 2022. OER rose 4.6% annualized in the three months ended in October vs. 3.1% over the last 12 months and just 2.2% in 2020. And there is scope for somewhat further acceleration given the historical relationship. Key pandemic-related categories like new and used cars, which should start to see easing prices in 2022, saw continued gains in October.  Medical care services, which had eased in September, rebounded sharply. Finally, headline CPI was stronger, primarily due to continued upward pressure on energy prices.
Overall, core inflation pressures remain significant. While there is scope for the pandemic-related categories to offset some of the acceleration in OER, there are few signs of that so far, and core inflation pressures will remain significant well into 2022.

ROSE by 0.94% in October, compared with market expectations for an increase of 0.60%.
  • Food prices increased by 0.91% while energy prices rose by 4.8%.  
  • Prices for gasoline rose by 6.1% while prices for fuel oil increased by 9.4%, prices for electricity climbed by 1.8%, and prices for natural gas rose by 6.6%.  
  • Energy prices are now 30.0% ABOVE their year-ago level.  
Overall consumer prices are now 6.2% ABOVE their year-ago level; in October 2020, consumer prices were 1.2% ABOVE their year-ago level.
The Core CPI ROSE by 0.60%, compared with market expectations for an increase of 0.40%.
  • Prices for commodities excluding food and energy commodities rose by 1.0%.
  • Gains in used cars & trucks (+2.5%), tobacco (+1.9%),  were only partially offset by declines in alcoholic beverages (-0.2%).
  • Prices for services excluding energy services rose 0.4% with a moderate increase in medical care services (+0.5%), shelter (+0.5%), and owner's equivalent rent (+0.4%).
Core consumer prices are now 4.6% ABOVE their year-ago level; in October 2020, consumer prices were 1.6% ABOVE their year-ago level.