March 14, 2023

The CPI rose 0.4% in February after climbing 0.5% in January.  It rose 6.4% in 2022,  The year-over-year increase is currently 6.0%.  We expect the CPI to increase  4.8% in 2023, and 3.0% in 2024.  While the markets are convinced that inflation will now improve rapidly, that is unlikely to happen.

Food prices rose 0.3% in February after gaining 0.5% in both December and January.     In the past year food prices have risen 9.2%.  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 at  rapid rate.  Ukraine is a big exporter of wheat and corn.  There will be few exports of corn and wheat coming from Ukraine any time soon.  While the West is finally getting tons of rain after an extreme drought, it is not clear how crop production in that part of the country will be affected.  Food prices are unlikely to fall quickly.

Energy prices declined 0.4% after rising 2.0% in January.   In the past year they have risen 5.2%.  After a big jump to $120 per barrel last  year as the war began, crude prices have fallen considerably to $75.  The decline was caused by the steady flow of additional oil from the Strategic Petroleum Reserve.  Tapping of the SPR has now ceased and it has fallen 50% from what it was at the beginning of the 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.  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 rose 0.5% in February after increasing 0.4% in both December and January.  The  year-over-year increase now stands at 5.5% after having risen 5.7% in 2022.  The core CPI is simply not decelerating quickly.

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 risen 1.0% in the past year as supply constraints have disappeared.  However, inflation in the service sector (which is twice the size of the goods sector) has been steadily rising and has risen 7.6% in the past year.  This is important because services make up two-thirds of the entire CPI.

Amongst the goods categories, used car prices fell 2.8% in February after having declined 1.9% in January..  Used car prices have fallen 13.6% in the past year.

New car prices rose 0.2% in February after climbing 0.3% in January.  For the year as a whole new car prices have risen 6.3%.

Prices in the service sector are being driven by housing.  The sizable monthly gains in the first half of last year have turned into declines in recent months.  Home prices should decline every month between now and the middle of this 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 which will filter through to rents.  The shelter component of the CPI rose 0.8% in February after gaining 0.7% in January.  This means the year-over-year increase now stands at 8.1%. This is a big deal because rents represent one-third of the entire CPI index.  We are now expecting a 5.2% increase in the shelter component in 2023.

Also in the service sector, airfares rose 6.4% in January after having declined 2.1% in January.  They have been falling since June of last year and the decline undoubtedly reflects the lower cost of jet fuel.  In the past year airfares have risen 26.5%.


Hotel room rates rose 2.6% in February after rising 1.5%  in January.  Room rates have risen  7.4% 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 in 2020 and 2021.  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 last year.  Currently, the level of M-2 stands $2.6 trillion higher than its desired 6.0% growth path.  That means that the economy currently has $2.6 trillion more liquidity than it needs.  If the Fed continues to shrink its portfolio in the upcoming year, the excess liquidity may be eliminated by the end of 2023.

The core CPI rose 5.7% last year.  We expect it to increase 4.8% in 2023, and 3.0% 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