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

June 10, 2022
Bottom Line: Core CPI rose slightly more than expected in May as headline price pressures rose with higher energy prices. Year-on-year comparisons for core and headline readings continue to 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, accelerated to 0.6%, the fastest pace this cycle, continuing to drive core higher. OER historically lags home price moves by over a year, and we expected the acceleration to last through the 2nd Quarter. It rose 6.1% annualized in the three months ended in May vs. 5.1% 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 rebounded for the second month. Consumers continue to shift back towards services after massive goods consumption during the pandemic, but clothing and used car prices jumped after declining in April. New car prices rose amid continued slow production due to supply chain constraints. Services prices jumped, led by another massive increase in airfares ahead of the summer travel season. Finally, medical care services were higher for the third month but decelerated slightly. Medical care services were historically a significant driver of core prices before the pandemic, so we remain somewhat concerned that the re-acceleration in 2022 could persist and hold up core prices longer than expected.
Overall, we expect core inflation pressures will remain sticky through the summer months, buoyed by services prices as consumers shift away from goods consumption toward services. That said, high goods inventories should begin to offer some downward pressure on prices later this summer just as the lagged impact of housing prices on OER starts to become a source of deceleration on core CPI.
ROSE by 0.97% in May, compared with market expectations for an increase of 0.70%.
  • Food prices increased by 1.17% while energy prices rose by 3.9%.  
  • Prices for gasoline rose by 4.1% while prices for fuel oil increased by 13.1%, prices for electricity climbed by 1.3%, and prices for natural gas rose by 8.0%.
  • Energy prices are now 34.4% ABOVE their year-ago level.  
Overall consumer prices are now 8.5% ABOVE their year-ago level; in May 2021, consumer prices were 4.9% ABOVE their year-ago level.
The Core CPI
ROSE by 0.63%, compared with market expectations for an increase of 0.50%.
  • Prices for commodities excluding food and energy commodities rose by 0.7%.
  • Gains in used cars & trucks (+1.8%), and new vehicles (+1.0%) led the increase
  • Prices for services excluding energy services rose 0.6% with a moderate increase in transportation (+1.3%), shelter (+0.6%), and owner's equivalent rent (+0.6%).
Core consumer prices are now 6.0% ABOVE their year-ago level; in May 2021, consumer prices were 3.8% ABOVE their year-ago level.
Article by Contingent Macro Advisors