Analyzing Key Inflation Components and Economic Indicators: A June Outlook
June 02, 2023
Introduction: As we bid farewell to the month of May, it’s time to examine some crucial factors influencing inflation and gauge the progress we can anticipate in the upcoming June 13 release of the CPI inflation data. By analyzing various elements such as oil prices, used car prices, rental costs, employment figures, and the housing market, we can gain insights into the potential direction of inflation and its impact on the economy.
Oil prices and used car prices: In April, oil prices soared due to OPEC’s production cuts, but they have since subsided and are currently trading below $70/barrel. This decline in oil prices is expected to alleviate inflationary pressure in the upcoming CPI report. Additionally, used car prices, which experienced a significant surge in April, are now rising at a slower pace. Moreover, with seasonal adjustments during this time of year, the used car price index could even register a negative change, further reducing inflationary pressure compared to April.
Rental costs: Although rental costs have been slow to reflect the downward trend in real-time, the most recent data suggests they are starting to catch up. The May 10 inflation report revealed that new shelter costs were lower than those from the previous year. With current rents dropping rapidly, as indicated by Apartment List’s May Rental Report, we can expect rents to continue declining in the CPI report, thereby contributing to a decrease in inflation.
Replacing figures in the year-over-year calculation: Examining the year-over-year calculation, we note that the headline figure stood at 0.9% and the core figure at 0.6%. In April, both headline and core monthly inflation readings were 0.4%. These figures indicate a potentially favorable outcome for interest rates.
Employment figures: While inflation is gradually decreasing, the Federal Reserve seems to rely on lagging indicators rather than real-time data, potentially leading to mistakes in their decision-making. The stubbornness of the Bureau of Labor Statistics’ jobs data has caught the Fed’s attention, but real-time indicators suggest an inflection point. Job openings, particularly in the construction sector, have declined from their peak, while the leisure and hospitality sector has experienced shrinking employment. These trends may result in weaker job creation numbers.
Debt Ceiling Deal and the housing market: President Biden and House Speaker Kevin McCarthy have reached a debt deal in principle, alleviating fears of a default and receiving a positive response from the bond market. In the housing market, the Case Shiller Home Price Index indicates a rise in home prices, signaling a recovery from the recent inflection point. Although year-over-year appreciation may eventually turn negative, comparisons to the peak last year underscore the strength of the housing market, with projected appreciation of 5-6% for the full year of 2023.
Conclusion: As we eagerly await the release of the May CPI inflation data, various indicators suggest a potential decrease in inflationary pressure. Factors such as declining oil prices, a moderation in used car prices, decreasing rental costs, and changes in the employment landscape all contribute to this outlook. It remains to be seen whether the Federal Reserve will consider these indicators in their decision-making process and adjust their policies accordingly. Additionally, recent developments such as the debt ceiling deal and the recovering housing market provide further reasons for optimism about the overall economic trajectory in the coming months.