U.S. Economic Brief || Core CPI breaks above 6%

Core CPI breaks above 6%

*The U.S. Consumer Price Index (CPI) jumped 0.8% m/m in February, lifting its yr/yr increase to 7.9%, its highest level in four decades driven by sharp increases in food and energy prices, continued price increases of durable goods, and accelerating shelter costs (Chart 1). While February’s CPI print was largely in line with consensus expectations, inflationary risks are tilted to the upside. Russia’s invasion of Ukraine, the two nations’ roles as key commodity producers and exporters and the litany of sanctions imposed on Russian companies and financial entities, has contributed to surging energy, metal, and agricultural commodity prices – which are likely to drive headline inflation even higher in the near term.

*Persistent elevated inflation will likely further dent consumer confidence and dampen real purchasing power, and evidence suggests inflationary expectations tend to be most affected by the prices of goods and services bought most frequently, such as food and energy, which are components of the CPI that have experienced some of the biggest price increases in recent months. Market and household-survey based measures of long run inflationary expectations have largely remained stable, but if they were to abruptly begin to drift upwards, the Fed would be forced into a difficult position.

*Core CPI (excluding food and energy) increased 0.5% m/m, lifting its yr/yr increase to 6.4%. Core inflation is likely to moderate but remain at an elevated level – the core CPI rose 6.7% on a four month annualized basis, and 6.2% annualized in February. Goods price increases were relatively broad based in February with prices of household furnishings and supplies (+0.8% m/m), apparel (+0.7% m/m), and recreation commodities (+0.9% m/m) all increasing. Labor shortages, ongoing supply chain bottlenecks, and now disruptions to commodity production and trade from Russia and Ukraine could elongate the time needed for goods production to expand sufficiently to meet strong demand. Compounding these factors, the omicron wave of infections further delayed the shift in consumption from goods to services, and likely accentuated goods inflation in February.

*Used vehicle prices provided some relief declining 0.2% m/m, although base effects lifted the yr/yr increase to 41.2%. Anecdotal evidence and private sector data suggest used vehicle prices have reached an inflection point, while vehicle rental services, a key source of demand for new vehicles at this point, have largely rebuilt their fleets. On the other hand, new vehicle prices continue to increase rising 0.3% m/m in February and vehicles remain a significant contributor to yr/yr inflation, with new and used vehicles together contributing 1.6pp to headline inflation (Chart 3).

*Shelter inflation accelerated in February, rising 0.5% m/m, underpinned by continued increases in rent and owners’ equivalent rent (OER) inflation. We expect shelter inflation, which lags market rent and home price increases by 12-16 months, to continue to accelerate through 2022 and peak at close to 6% by year end in a “catch-up” to soaring market rents and home prices (Chart 4). Rent and OER increased 0.6% m/m and 0.4% m/m, respectively, lifting their yr/yr increases to 4.2% and 4.3%. Combined, these two components account for roughly one-third of the CPI basket, and as shelter inflation accelerates it will exert significant upward pressure on headline and core CPI inflation.

*Food and energy prices jumped in February rising 1% m/m and 3.5% m/m, respectively (Chart 5). Disruptions to energy commodity exports out of Russia, heightened geopolitical risks, and a U.S. ban on imports of Russian oil and gas have contributed to sharp increases in gasoline and home heating oil costs that will likely exacerbate energy inflation in the coming months. Russia and Ukraine are also major exporters of agricultural commodities, including wheat, while Russia is also a major producer and exporter of fertilizers. Armed conflict is also likely to disrupt the planting and harvesting seasons in Ukraine, while shipping and distribution in and out of the region has been heavily affected. These factors have led to surging agricultural commodity prices, and will be reflected in food prices, albeit with a lag.

Chart 1.

Chart 2.

Chart 3.

Chart 4.

Chart 5.

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

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

© 2022 Berenberg Capital Markets, LLC, Member FINRA and SPIC

Remarks regarding foreign investors. The preparation of this document is subject to regulation by US law. The distribution of this document in other jurisdictions may be restricted by law, and persons, into whose possession this document comes, should inform themselves about, and observe, any such restrictions. United Kingdom This document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers. Copyright BCM is a wholly owned subsidiary of Joh. Berenberg, Gossler & Co. KG (“Berenberg Bank”). BCM reserves all the rights in this document. No part of the document or its content may be rewritten, copied, photocopied or duplicated in any form by any means or redistributed without the BCM’s prior written consent. Berenberg Bank may distribute this commentary on a third party basis to its customers.

Member FINRA & SIPC
This email and any files or attachments transmitted with it may contain confidential or privileged information and are intended solely for the use of the intended recipient. If you are not the intended recipient, please do not copy, retain, disclose or use any part of the message or its attachments. Please notify the sender immediately by return email and destroy or delete any copies. Dissemination or use of this information by anyone other than the intended recipient is unauthorized and may be illegal. Communications by email cannot be guaranteed to be secure or error-free. Emails and their attachments are subject to being intercepted, becoming corrupted, getting lost or delayed, or may contain viruses. Therefore, neither the sender nor Berenberg Capital Markets LLC (BCM) accepts any liability for any errors or omissions in the content of this message or problems in its transmission, including those arising as a result of its transmission over the internet.
BCM does not assume liability for the correctness and completeness of all information given and/or attachments contained herein. The provided information has not been checked by a third party, especially an independent auditing firm. BCM explicitly points to the stated date of preparation. The information given can become incorrect due to passage of time and/or as a result of legal, political, economic or other changes. BCM does not assume responsibility to indicate such changes and/or to publish an updated document. Any document(s) or attachment(s) is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers.
In light of upcoming regulatory changes, please be informed that BCM will continue to share information with you until unsubscribe@berenberg-us.com receives your termination/deletion request. For more information about the General Data Protection Regulation (GDPR) and our privacy policies please refer to https://www.berenberg-us.com/legal-notice. BCM reserves all the rights in this communication. No part of this communication or its content may be rewritten, copied, photocopied or duplicated in any form by any means or redistributed without BCM’s prior written consent.
The information contained herein and sourced may have been adopted from various news sources, for example, Bloomberg, Reuters, Street Account and various other sources. BCM does not claim accuracy, completeness, timeliness, suitability, or otherwise regarding all the information on the securities, stock markets, or developments referred to within. On no account should the Content be regarded as a substitute for the recipient procuring information for himself/herself or exercising his/her own judgments. BCM is not responsible for any recipient(s) use of this information. This Content is not a solicitation or an offer to buy or sell any of the securities contained herein. This information does not constitute a recommendation or take into account the particular investment objectives, financial situations, or needs of clients. Clients should consider whether any advice or recommendation in this Content is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of securities which may be referred to in this Content and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain securities.