May 13, 2025

The CPI rose 0.2% in April after having declined 0.1% in March.. The year-over-year increase is 2.3%.  We now expect the overall CPI to increase 3.1% in 2025.

Food prices declined 0.1% in April after having climbed 0.4% in March.  In the past year food prices have risen 2.7%.  Egg prices fell 12.7% in April but have still risen by 49% in the past year.  Economists typically subtract food and energy prices from the CPI and focus on the so-called “core” rate of inflation.  That is because these two categories are extremely volatile.  They might go up for a few months but then reverse direction and decline almost as quickly as they rose.

Energy prices rose 0.7% in April after having fallen 2.4% in March.   In the past year they have fallen 3.5%.

The core CPI rose 0.2% in April after gaining 0.1% in March.   The  year-over-year increase stands at 2.8%.  We expect the core CPI to increase 3.1% in 2025.

At the moment, goods sector inflation has risen slightly  in the past year as consumers have been spending less money on goods but more on services. Core goods sector inflation has risen 0.2% in the past year.  However, inflation in the core service sector (which is twice the size of the goods sector) has been steadily rising and has climbed 3.6% in the past year.  This is important because services make up two-thirds of the entire CPI.

Prices in the service sector are to a large extent being driven by housing.  Home prices continue to climb but the rate of increase seems to be slowing.

The shelter component of the CPI rose 0.4% in April after climbing 0.1% in March.  The year-over-year increase now stands at 4.0%. This is a big deal because rents represent one-third of the entire CPI index.  We expect the shelter component to slow gradually throughout the remainder of 2025 to 3.7%,

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This is because there is a good correlation between the shelter component of the CPI and what happened to the Case Shiller index of home prices with a lag of about 15 months. This means that the shelter component should slow as the year progresses from 4.0% today to 3.7% by the end of  2025  which is one reason that the core inflation rate could shrink somewhat in the months ahead.

The two of the worst performing service sector components in recent months have been automobile insurance and auto repairs which in the past year have risen 6.4% and 7.6%, respectively.  With respect to the automobile insurance category, higher car prices, rising car repair costs (largely labor), an increase in disaster-related claims, and theft and vandalism in high crime areas of big cities are the primary factors behind the gain.  While both categories have been rising very rapidly, the insurance category has slowed down in the recent months.

Typically, M-2 rises at about a 6.0% pace.  But when the Fed purchased $4.0 trillion of government securities back in the spring of 2020, money growth soared.  It continued to grow rapidly right up through March of 2022.  Since then the Fed has been shrinking its portfolio and that has caused the money supply to decline.  Currently, the level of M-2 stands $0.4 trillion higher than its desired 6.0% growth path.  That means that the economy currently has $0.4 trillion more liquidity than it needs.  If the Fed continues to shrink its portfolio the excess liquidity should be nearly eliminated  in the months ahead which should allow the inflation rate to continue to shrink.

After increasing increase 3.2% in 2024 we expect the core CPI to increase 3.1% in 2025.  Keep in mind that the core CPI runs about 0.3% higher than the Fed’s target core personal consumption expenditures index.  Thus, a core CPI of 3.1% at the end of 2025 is equivalent to 2.8% or so for the Fed’s core PCE index which it targets at 2.0%.

Stephen Slifer

NumberNomics

Charleston, SC