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CPI: Stubbornly High Due to Lags

March 14, 2023
Bottom Line: Consumer prices rose in February, mostly as expected, as gasoline prices rose further. Core CPI was up 0.45%, stubbornly robust as Owner's Equivalent Rent (OER), the largest component of core, was up 0.7%, consistent with the long historic long lag between actual rents and the imputed rent in CPI. Used car prices were lower, countering expectations for an increase based on the major private market surveys of prices. Airfares rose sharply, though, offsetting some of the impact of used cars in this report. Medical care services prices were soft, pushing the medical category down about 0.5%.
The lags holding core CPI stubbornly high are consistent with our modeling. Expect core CPI to remain stubbornly high, led by OER for several more months, before the lag with actual rents catches up with OER. We should start to see material disinflation and even deflation in OER later in the year. Critically, medical care, which was often the most significant driver of CPI before the pandemic, is trending lower -- and that should help disinflation take hold in core CPI once the OER lags are behind us.

ROSE by 0.37% in February, compared with market expectations for an increase of 0.50%.
  • Food prices increased by 0.39%, while energy prices fell by 0.6%.  
  • Prices for gasoline rose by 1.0% while prices for fuel oil declined by 6.4%; prices for electricity climbed by 0.5%, but prices for natural gas fell by 8.0%.  
  • Energy prices are now 5.0% ABOVE their year-ago level.  
Overall consumer prices are now 6.0% ABOVE their year-ago level; in February 2022, consumer prices were 8.0% ABOVE their year-ago level. 
The Core CPI ROSE by 0.45%, compared with market expectations for an increase of 0.40%.
  • Prices for commodities excluding food and energy commodities fell by 0.0%.
  • Gains in tobacco (+1.0%), and apparel (+0.8%) were offset by declines in used cars & trucks (-2.8%), and alcoholic beverages (-0.3%).
  • Prices for services excluding energy services rose 0.6%, with a moderate increase in transportation (+1.1%), and owner's equivalent rent (+0.7%).
Core consumer prices are now 5.5% ABOVE their year-ago level; in February 2022, consumer prices were 6.4% ABOVE their year-ago level. 
Article by Contingent Macro