U.S. CPI inflation accelerates further as shelter costs jump

U.S. CPI inflation accelerates further as shelter costs jump

*The U.S. Consumer Price Index (CPI) increased 0.6% m/m (consensus 0.4%) lifting its yr/yr increase to a four-decade high of 7.5% (Chart 1). Core CPI (excluding food and energy) increased 0.6% m/m and 6% yr/yr. January’s rise in the headline and core indices reflects broad-based inflationary pressures that include an acceleration in shelter costs, sharp increases in food and energy prices, and increases in used vehicle prices.

*While headline yr/yr inflation measures are likely to moderate in the coming months as supply chain disruptions dissipate and consumption shifts from durable goods toward services, inflation is likely to remain elevated. Base effects from elevated inflation through 2021 will contribute to declines in yr/yr measures, even as m/m annualized, or q/q annualized percentage increases remain elevated. A critical question is how the Fed and markets respond if, as we expect, inflation moderates through 2022 but remains significantly above the Fed’s inflation forecast. Partly in a reaction to January’s higher than expected CPI and payroll employment reports fed funds futures markets are now fully pricing in four interest rate hikes by July.

*Shelter costs, measured using owners’ equivalent rent (OER) and rent of primary residences jumped in January, rising 0.4% and 0.5% m/m respectively, and lifting the yr/yr increases to 4.1% and 3.8% (Chart 2). On aggregate shelter costs increased 0.3% m/m, weighed down by a 3.9% m/m decline in the price of lodging away from home, likely reflecting the omicron wave of infections, and a trend that is likely to reverse through 2021.

*Moreover, shelter costs, which make up one-third of headline CPI and 40% of the core measure, are likely to rise further as the increase in market rents over the last year are reflected in measures of shelter inflation with significant lags. Market rents have increased 15.7% yr/yr according to Zillow’s Observed Rent Index, and we forecast yr/yr inflation in OER and rent will likely rise to 5.5%+ and remain elevated through year-end 2023, adding substantially to yr/yr headline and core CPI in 2022-23. (OER, Services Prices, and Inflation, 18 January, 2022)

*Used vehicle prices increased 1.5% m/m on the heels of a 3.3% m/m increase in December, lifting the yr/yr increase to 40.5% and contributing 1.1pp to headline CPI inflation (Chart 3). Surging used vehicle prices reflect semiconductor shortages that stalled production of new vehicles and a rebound in demand from auto rental companies seeking to rebuild inventories after liquidating them earlier in the pandemic. Data on used vehicle prices from Manheim indicate used vehicle prices were flat through January, suggesting price increases may begin to moderate in the near term. New vehicle prices were flat in January, but increased 12.2% yr/yr and 10% on a three-month annualized basis. A number of auto manufacturers have recently idled plants due to parts shortages, which together with limited inventory and strong pent up demand will likely continue to exert upward pressure on new vehicle prices.

*Energy prices increased 0.9% m/m and 27% yr/yr reflecting a 2.9% m/m increase in energy services prices, contributing 1.7pp to the yr/yr increase in the headline CPI (Chart 4). Energy commodity prices have increased sharply over the last two months reflecting an increase in demand as the impact of the pandemic dissipates and lack of supply in part due to political and regulatory opposition to domestic oil and gas drilling. Elevated inflation continues to weigh heavily on lower-income households for whom food, energy, and shelter costs make up a relatively larger proportion of expenses. Food prices increased 0.9% m/m and 7% yr/yr, and evidence suggests household inflationary expectations are closely tied to price changes among items they purchase most frequently. Sustained sharp increases in food and energy prices skew the risks that household inflationary expectations become unanchored to the upside.

Chart 1.

Chart 2.

Chart 3.

Chart 4.

Mickey Levy, mickey.levy@berenberg-us.com

Mahmoud Abu Ghzalah, mahmoud.abughzalah@berenberg-us.com

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