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CPI: Headline Jumps, Core Offers Hints of Easing

April 12, 2022
Bottom Line: CPI rose more than expected in March, driven by the jump in energy prices and continued upward pressure on food prices. But Core CPI rose less than expected, up 0.3%, the slowest reading in six months.
Owner's Equivalent Rent (OER), a key measure of shelter prices and nearly a third of core CPI, continued to drive core higher. It rose 0.43%, in line with the recent trend and consistent with its historical lag with home prices. OER historically lags home price moves by over a year, and the acceleration should last through the 2nd Quarter. It rose 5.24% annualized in the three months ended in February vs. 4.3% over the last 12 months and just 2.2% in 2020. While OER will remain high for several more months, our models suggest that further acceleration is unlikely given the historical relationship.
Core goods components were lower, while services prices rose as consumers started to shift back towards services consumption. Used car prices, a source of massive upward pressure on core throughout the pandemic, were down nearly 4%. Airfares were sharply higher, up nearly 11%. Moreover, medical care services were sharply higher. Medical care services were historically a significant driver of core prices prior to the pandemic, so we're watching this acceleration closely for signs that it will persist and hold up core prices longer than expected.
Overall, core inflation pressures will remain significant throughout the 1st Half. While the headline reading was every bit as hot as expected because of gasoline prices, there were hints of deceleration in key pandemic-related categories, but keep an eye on medical care services.
The CPI ROSE by 1.24% in March, compared with market expectations for an increase of 1.20%.
  • Food prices increased by 0.99% while energy prices rose by 11.0%.  
  • Prices for gasoline rose by 18.3% while prices for fuel oil increased by 15.7%, prices for electricity climbed by 2.2%, and prices for natural gas rose by 0.6%.  
  • Energy prices are now 32.2% ABOVE their year-ago level.  
Overall consumer prices are now 8.6% ABOVE their year-ago level; in March 2021, consumer prices were 2.7% ABOVE their year-ago level.
The Core CPI ROSE by 0.32%, compared with market expectations for an increase of 0.50%.
  • Prices for commodities excluding food and energy commodities fell by 0.4%.
  • Gains in apparel (+0.6%), tobacco (+0.5%),  were offset by declines in used cars & trucks (-3.8%). 
  • Prices for services excluding energy services rose 0.6% with a moderate increase in transportation (+2.0%), medical care services (+0.6%), and shelter (+0.5%).
Core consumer prices are now 6.4% ABOVE their year-ago level; in March 2021, consumer prices were 1.7% ABOVE their year-ago level.
Article by Contingent Macro Advisors