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CPI: Services Jump Even As Year-on-Year Pressure Eases

May 11, 2022
Bottom Line: Core CPI rose more than expected in April even as headline price pressures eased with slightly lower energy prices. Year-on-year comparisons for core and headline readings now calibrate off very high readings a year ago, suggesting we should continue to see easing in the year-on-year figures.
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 0.45%, 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 5.48% annualized in the three months ended in February vs. 4.8% over the last 12 months and just 3.8% in 2021 and 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 showed only a slight rebound after declines in March. Consumers continue to shift back towards services after massive goods consumption during the pandemic. Clothing and used car prices were lower again, while new car prices rose amid continued slow production due to supply chain constraints. Services prices jumped, led by a massive increase in airfares ahead of the summer travel season. Moreover, medical care services were sharply higher for the second month. Medical care services were historically a significant driver of core prices before the pandemic, so we're watching this acceleration closely for signs that it will persist and hold up core prices longer than expected. We now have two months.
Overall, core inflation pressures will remain significant well into the 2nd Half of the year, buoyed by services prices as consumers shift back towards goods consumption.
ROSE by 0.33% in April, compared with market expectations for an increase of 0.20%.
  • Food prices increased by 0.87% while energy prices fell by 2.7%.  Prices for gasoline fell by 6.1% while prices for fuel oil increased by 3.7%, prices for electricity climbed by 0.7%, and prices for natural gas rose by 3.1%.  
  • Energy prices are now 30.2% ABOVE their year-ago level.  
Overall consumer prices are now 8.2% ABOVE their year-ago level; in April 2021, consumer prices were 4.2% ABOVE their year-ago level.
The Core CPI ROSE by 0.57%, compared with market expectations for an increase of 0.40%.
  • Prices for commodities excluding food and energy commodities rose by 0.2%. Gains in new vehicles (+1.1%), tobacco (+0.4%),  were offset by declines in apparel (-0.8%), used cars & trucks (-0.4%).
  • Prices for services excluding energy services rose 0.7% with a moderate increase in transportation (+3.1%), medical care services (+0.5%), and shelter (+0.5%).
Core consumer prices are now 6.1% ABOVE their year-ago level; in April 2021, consumer prices were 3.0% ABOVE their year-ago level.
Article by Contingent Macro Advisors