February 13, 2924

The CPI rose 0.3% in January after climbing 0.2% in December. The year-over-year increase is currently 3.1%.  We expect the CPI to increase 3.1% in 2024.  While the markets are convinced that inflation will continue to improve rapidly, that is unlikely to happen.

Food prices rose 0.4% in January after climbing 0.2% in both November and December.    In the past year food prices have risen 2.5%.  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.  Currently, food prices have slowed from their torrid pace a year ago.  But it is important to remember that Ukraine is a big exporter of wheat and corn.  There will be few exports of corn and wheat coming from Ukraine any time soon.   Food prices are likely to remain elevated.

Energy prices rose 0.4% in January after gaining 0.2% in both November and December.  In the past year they have risen 2.5%.  After a big jump to $120 per barrel last  year as the war began in Ukraine, crude prices have fallen considerably.  The decline was caused in part by the steady flow of additional oil from the Strategic Petroleum Reserve.  Tapping of the SPR has now largely ceased and it has fallen 50% from what it was at the beginning of last year and is now at (in our opinion) a dangerously low level.  It is hard to see how oil prices can fall much further.  Meanwhile, crude oil inventories are the lowest they have been since 2000.  Our sense is that oil prices will climb from $74 or so today to $85 or so in 2024.

The core CPI rose 0.4% in December after climbing 0.3% in both November and December.  The  year-over-year increase now stands at 3.9%.  The core CPI is decelerating but further progress will be slow.

At the moment, goods sector inflation is essentially unchanged as consumers have been spending less money on goods but more on services. Core goods sector inflation has declined 0.3% in the past year as supply constraints have disappeared.  However, inflation in the core service sector (which is twice the size of the goods sector) has been steadily rising and has climbed 5.4% in the past year.  This is important because services make up two-thirds of the entire CPI.

Prices in the service sector are being driven by housing.  Home prices have risen every month since January 2023.  However, they seem to be slowing and such measures of prices on both new and existing homes have declined in recent months.

The shelter component of the CPI rose 0.6% in January after increasing 0.4% in both November and December.  This means the year-over-year increase now stands at 6.1%. This is a big deal because rents represent one-third of the entire CPI index.  A 6.1% increase in one-third of the entire CPI index is not at all consistent with an overall inflation rate of 2.0%.  We do expect home prices to fall somewhat this year which means that the shelter component should slow as the year progresses which is one reason that the core inflation rate should continue to shrink from 3.9% currently to 2.9% by the end of the year.

Also in the service sector, airfares rose 1.4% in January after gaining 0.9% in December.  They had been falling steadily since June of last year which undoubtedly reflected the lower cost of jet fuel.  But as oil prices have been rising, airfares have done the same.  In the past year airfares have declined 6.4%.

Hotel room rates jumped 2.4% in January after rising 0.1% in December.   They have been very volatile in recent months.  Room rates have risen 0.6% in the past year.

The inflation rate surged in 2020 and 2021 because of the dramatic growth in the money supply.  Typically, M-2 rises at about a 6.0% pace.  But when the Fed purchased $3.0 trillion of government securities back in the spring of 2020, money growth soared.  It continued to grow rapidly right up through March of 2022  Currently, the level of M-2 stands $1.1 trillion higher than its desired 6.0% growth path.  That means that the economy currently has $1.1 trillion more liquidity than it needs.  If the Fed continues to shrink its portfolio the excess liquidity should be nearly eliminated by the spring.

We expect the core CPI to increase 2.9% in 2024.  It will take another two years for the core CPI to come close to the Fed’s 2.0% inflation target.

Stephen Slifer


Charleston, SC