November 10, 2022

The CPI rose 0.4% in October after having risen 0.4% in September.  It rose 1.3% in 2020, and 7.1% in 2021.  The year-over-year increase now stands at 7.8,  We expect the CPI to increase 7.4% in 2022. 4.8% in 2023, and 2.9% in 2024.  The October gain was smaller than the 0.5% increase that had been excited and the markets are getting excited that this may cause the Fed to reduce the magnitude of its future  fed funds rate hikes.  The Fed probably will raise the funds rate 0.5% in mid-December after a series of 0.75% rate increases throughout 2022,  but that is what the Fed had in mind anyway.  It would be grossly premature to conclude that the CPI inflation rate wi beginning to soften by any appreciable amount.

Food prices rose 0.6% in October after climbing 0.7% in September, 0.8% in August and 1.1% in July.     In the past year food prices have risen 10.6%.  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.  But currently food prices have risen sharply and are likely to continue to climb.  Ukraine and Russia are big exporters of wheat in particular and corn.  At the same time droughts and fires in the West are going to take a toll on crop production this year.  It is hard to see how food prices are going to decline any time soon.

Energy prices jumped 1.8% in October after having fallen 2.1% in September.   After a big jump to $120 per barrel earlier in the year crude prices have fallen somewhat in recent months to $90.  However, in the past year energy prices have still risen 17.6%.  It is hard to see how they can fall further.  OPEC+ has agreed to cut production by 2.0 million barrels per day.  Less supply implies higher prices.  Meanwhile, crude oil inventories are the lowest they have been since 2005.  Finally, the current administration is putting a severe crimp on oil producers by shutting down pipelines and doing its best to drive the entire fossil fuel industry out of business.  At the same time Biden wants to drive domestic producers out of business, he is begging OPEC countries to boost their output.  This energy policy makes no sense.  Oil prices are not going to come down any time soon.

The core CPI for October rose 0.3% after climbing 0.6% in both August and September.  The  year-over-year increase now stands at 6.3% after having risen 5.5% in 2021.  The core CPI had been expected to increase 0.7% so this is the part of the report that got markets excited.

At the moment, goods sector inflation is slowing down as consumers have begun to spend less money on goods but more on services. Goods sector inflation has actually declined 0.4% the past year.  However, inflation in the service sector (which is much larger than goods) has been steadily rising and it, too, has risen 6.8% in the past year.

Amongst the goods categories, used car prices fell 2.4% in October after declining 1.1% in September, 0.1% in August, and 0.4% in July.  Thus, this is the fourth consecutive decline in used car prices which seems to reflect the greater availability of new cars where supply constraints are abating.  Used car prices have risen 2.0% in the past year which is far slower than it was earlier in the year

New car prices increased 0.3% in October after having risen 0.8% in September, 0.7% in August and  0.8% in July.  For the year as a whole new car and truck prices have risen 9.6%.  The chips shortage is less acute than it was earlier in the year, but it has not gone away completely.

Prices in the service sector are being driven by housing.  Home prices have jumped 13.0% in the past year.  However, the sizable monthly gains have turned into declines in recent months.  Home prices should to decline every month between now and the middle of next year.

The downturn in home prices will eventually cause rents to slow but that only happens with a lag.  Rents will continue to rise rapidly until about the middle of 2023.  Rents are also climbing as some frustrated potential buyers are forced to rent.  In addition, rental vacancy rates are the lowest they have been since the mid 1980’s.  Rents are going to climb rapidly until such time as builders can step up the pace of production and alleviate the severe housing shortage and/or home prices fall enough that it becomes cheaper to buy than to rent.  . All of this suggests that rents will continue to climb for some time to come.   The shelter component of the CPI rose 0.8% in October after having risen  0.7% in both August and September .  This means the year-over-year increase now stands at 6.9%, but the pace is accelerating.  In the past three months rents have been rising at an 8.8% pace.  This is a big deal because rents represent one-third of the entire CPI index.  We are now expecting a 7.1% increase for the shelter category in 2022 and 6.8% in 2023..

Also in the service sector, airfares fell 1.1% in October after having climbed by 0.8% in September after declining 4.6% in August and 7.8% in July  Those earlier declines undoubtedly reflect the lower cost of jet fuel in recent months.  However, oil prices have since stabilized.  In the past year airfares have risen 42.9%.

Hotel room rates jumped  5.6% in October after having fallen .2% in September and having been unchanged in August.  Room rates have risen 6.4% in the past year.

There is no doubt in our mind that the inflation rate will continue to rise rapidly because of dramatic growth in the money supply for the past two years.  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 this year.  Currently, the level of M-2 stands $3.2 trillion higher than its desired 6.0% growth path.  That means that the economy currently has $3.2 trillion more liquidity than it needs.  Even if the Fed shrinks its portfolio in the upcoming year, there is still likely to be excess liquidity at the end of 2023.   M-2 needs to continue to decline to eliminate much of the surplus liquidity that currently exists in the economy.

The core CPI rose 1.6% in 2020 and 5.5% last year.  We expect it to increase 6.1% in 2022, 4.3% in 2023, and 2.5% 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