United States
For the second month in a row, inflation came in lower than expected. Headline CPI was 0.1% month-on-month and core CPI was 0.2%, taking the year-on-year figures to 7.1% (the lowest since last December) and 6% (the lowest since July).
Most areas of the report offered good news, outside of the stubborn rental and food components (Table 1).
Table 1: Outside of shelter and food components, most categories moved in the right direction for the Fed1
| Sticky | Flexible | Non-Core | |||||
|---|---|---|---|---|---|---|---|
| Health services | Owners' Equivalent Rent | Airfare | Used Cars | Apparel | Food | Energy | |
| 12-month Average | 0.4% | 0.6% | 2.8% | -0.1% | 0.3% | 0.8% | 1.2% |
| Jul-22 | 0.4% | 0.6% | -7.8% | -0.4% | -0.1% | 1.1% | -4.6% |
| Aug-22 | 0.8% | 0.7% | -4.6% | -0.1% | 0.2% | 0.8% | -5.0% |
| Sep-22 | 1.0% | 0.8% | -0.8% | -1.1% | -0.3% | 0.8% | -2.1% |
| Oct-22 | -0.6% | 0.6% | -1.1% | -2.4% | -0.7% | 0.6% | 1.8% |
| Nov-22 | -0.7% | 0.7% | -3.0% | -2.9% | 0.2% | 0.5% | -1.6% |
There are three key reasons we are optimistic about CPI falling further next year: base effects, falling goods prices and potentially peaking rental inflation by Q2 2023. The Fed will also be watching non-shelter services, which also moved in the right direction this month.
Base effects bode well for falling CPI into summer 2023
This time last year, CPI accelerated particularly rapidly, from 5.4% last September to 7% by year end (the acceleration continued into summer 2022).
As such, if inflation simply maintains recent trends it will fall to the 4-5% region by next summer (Figure 1).
Figure 1: At current trends, base effects will take headline and core CPI closer to 4-5%2
Untangling supply chains are helping to ease goods prices
For the second month in a row, core goods prices were in deflation, this time at -0.4% month-on-month. Used car prices were the second largest negative contributor and leading indicators, such as the Manheim Used Car index, indicate that the bottom is not in, as the index fell -14.2%3 last month, its largest fall ever.
New vehicle inflation also saw some relief at 0.04% month-on-month, the lowest since January, helped by untangling of supply chain pressures across the board (Figure 2).
Figure 2: Untangling supply chains are helping to ease pressure on goods prices4
The BLS estimates health insurance CPI, in large part, by calculating the growth in the ratio of insurer retained earnings to total premiums. However, the BLS only receives the data annually, primarily from the National Association of Insurance Commissioners (NAIC) and the California Department of Managed Health Care (DMHC) and spreads the impact over the course of the year.
This took ~6bp off CPI month-on-month. Due to base effects, assuming a consistent 2.5% monthly drag over the next year (in line with the latest NAIC figures) health insurance CPI could fall below -20% year-on-year (Figure 3), into 2023, taking over ~40bp off year-on-year CPI by this time next year.
Figure 3: Goods and services spending is still normalizing5
