The action is in services. But now new & used vehicle prices are rising again. And energy. Food edges to new painful high.
By Wolf Richter for WOLF STREET.
Inflation in core services remains hot, and in December increased by 5.3%, driven by housing; insurance of all kinds; admissions to fun stuff, such as concerts and sports events; and audio and video services, such as streaming and cable. Core services account for over 61% of the Consumer Price Index, and that’s where inflation has gotten entrenched.
Durable goods prices fell again, with prices down quite a bit from the peak in August 2022, but they fell more slowly than before – as used vehicle prices ticked up for the second month in a row after a steep decline, even while wholesale prices continued to fall. New vehicle prices inched to a new record from their long and high plateau.
Food at home ticked up to a new record from very high levels.
And the energy components that consumers pay for directly, dominated by gasoline, inched up for the month, but were still down year-over-year.
Core CPI, a measure of underlying inflation that excludes food and energy products, rose by 3.9% year-over-year in December, according to the CPI data released today by the Bureau of Labor Statistics, just a hair below the prior month (+4.0%), pushed down by the decline in durable goods, but pushed up by the jump in core services.
Overall CPI rose by 3.4% year-over-year, an acceleration from the prior month (3.1%), and the fastest increase since September.
The chart shows core services CPI (red), core CPI (blue), and overall CPI (yellow). Core CPI has just about flattened out at the 4% line.
Core CPI, month-to-month, accelerated to 0.31% in December from October, the second month in a row of acceleration and fastest increase since September. Annualized, this increase amounts to 3.8% (blue in the chart below).
The three-month moving average, which irons out the month-to-month ups and downs, rose by 0.27%, and has been increasing at roughly the same rate over the past three months (red). The chart shows the annualized percentage changes:
Core services – where the action is.
The CPI for core services (without energy services) on a month-to-month basis rose 0.44% in December from November, or by 5.4% annualized. The three-month moving average rose by 0.41%, or by 5.1% annualized.
Inflation in core services had decelerated in early 2023 through the summer but then began to accelerate again. Month-to-month annualized, the three-month moving average has accelerated from 4% during the summer to over 5% for the past four months, which is very disconcerting. The chart shows the annualized percentage changes:
The Owners’ Equivalent of Rent CPI rose by 0.47% in December from November, or 5.8% annualized. The three-month moving average rose by 0.46%.
The three-month moving average (red) shows how this rent index has re-accelerated from July onward. It looks like housing inflation, on a month-to-month basis, has now gotten hung up somewhere near the 6% range.
The OER index accounts for 26% of overall CPI. It is based on what a large group of homeowners estimates their home would rent for and is designed to estimate inflation of “shelter” as a service for homeowners.
The Rent of Primary Residence” CPI decelerated to +0.43% in December from November, after having run very hot four months in a row. But the increase remains higher than during the summer.
The three-month moving average rose by 0.50%, or by 6.2% annualized, another indication of housing inflation getting stuck in the 6% range.
The Rent CPI accounts for 7.7% of overall CPI. It is based on actual rents that tenants actually paid. The survey follows the same large group of rental houses and apartments over time and tracks what tenants, who come and go, actually pay in these units.
Year-over-year, the OER CPI rose by 6.3% (green in the chart below) and Rent of Primary Residence rose by 6.5% (red).
“Asking rents…” The Zillow Observed Rent Index (ZORI) and similar rent indices track “asking rents,” which are advertised rents of vacant units on the market. Because rentals don’t turn over that much, the ZORI’s spike in 2021 through mid-2022 never fully made it into the CPI indices because not many people actually ended up paying those asking rents.
Zillow has not yet released the ZORI for December. In November, it dipped a little, as is typically the case this time of the year.
The chart shows the CPI Rent of Primary Residence (blue, left scale) as index values, not percentage change; and the ZORI in dollars through November (red, right scale). The left and right axes are set so that they both increase each by 50% from January 2017, with the ZORI up by 47% and the CPI Rent up by 35% since 2017:
Rent inflation vs. home-price inflation: The red line represents the CPI for Rent of Primary Residence (tracking actual rents). The purple line represents the Case-Shiller Home Price 20-Cities Composite Index, which lags a few months and is now putting in a double top. Both lines are index values set to 100 for January 2000
Medical care services includes health insurance. Since October 2022, we’ve lambasted the method the BLS uses to estimate health insurance inflation, and the grotesque results this produced. December was the third month after the BLS tweaked the system (my rant two months ago that also explains some of the tweaks: “The Collapse of the Health Insurance CPI (How it Became Chickenshit).”
Starting in October, Health insurance CPI has been rising at a rate of about 1% per month. But this doesn’t undo the grotesque 4%-per-month plunges during the prior 12 months that had caused the year-over-year health insurance CPI to collapse by 37% through September 2023. With these 1% per month increases, the year-over-year collapse is being gradually reduced, and in December was at -27%, down from -37% in September.
So medical care services, which includes health insurance, jumped month-to-month by 0.7%, but the year-over-year collapse of its health insurance component (-27%) still caused the medical care services CPI to be slightly negative year-over-year (-0.5%). It will become positive for the CPIs in early 2024 and will become more positive each month for a while.
The table is sorted by weight of each service category in the overall CPI. The CPI for medical care services is the third largest item, with a weight of 6.4% in overall CPI, and over 10% in the core services CPI.
Also note the continued spike in motor vehicle insurance.
Major Services without Energy
Weight in CPI
MoM
YoY
Services without Energy
61.4%
0.5%
5.5%
Owner’s equivalent of rent
26.0%
0.5%
6.3%
Rent of primary residence
7.7%
0.4%
6.5%
Medical care services & insurance
6.4%
0.7%
-0.5%
Food services (food away from home)
4.9%
0.3%
5.2%
Education and communication services
4.8%
0.2%
1.3%
Motor vehicle insurance
2.9%
1.5%
20.3%
Admission to movies, concerts, sports events; club memberships
1.5%
1.6%
5.2%
Other personal services (dry-cleaning, haircuts, legal services…)
1.5%
0.1%
6.4%
Motor vehicle maintenance & repair
1.1%
-0.3%
7.1%
Water, sewer, trash collection services
1.1%
0.1%
5.2%
Video and audio services, cable, streaming
1.0%
0.7%
5.3%
Hotels, motels, etc.
0.9%
0.4%
-0.5%
Pet services, including veterinary
0.6%
0.8%
7.6%
Airline fares
0.5%
1.0%
-9.4%
Tenants’ & Household insurance
0.4%
0.3%
3.6%
Car and truck rental
0.1%
-0.7%
-12.1%
Postage & delivery services
0.1%
0.4%
0.7%
Since March 2020, the core services CPI has increased by 18%. This chart shows the core services CPI as a price index, using the index value, not as percentage-change of that index value.
If you hold your tongue just right, you can see how the curve became a little less steep in 2023 into the summer and then steepened again. To be honest, this is kind of a hopeless-looking chart in inflation terms, unlike what we’ll see in a moment with durable goods:
Durable goods.
The Durable Goods CPI is dominated by new and used vehicles, information technology products (computers, smartphones, home network equipment, etc.), appliances, furniture, etc.
The index dropped 0.50% for the month and by 1.2% year-over-year, having now wobbled lower ever since the peak in July 2022, as the shortages, supply bottlenecks, and transportation chaos have receded.
This chart shows the price level of the index (index value), not the percentage change of the index:
Major durable goods categories
MoM
YoY
Durable goods overall
-0.5%
-1.2%
New vehicles
0.3%
1.0%
Used vehicles
0.5%
-1.3%
Information technology (computers, smartphones, etc.)
-0.4%
-7.6%
Sporting goods (bicycles, equipment, etc.)
-1.2%
-2.5%
Household furnishings (furniture, appliances, floor coverings, tools)
-0.4%
-0.9%
New vehicles CPI was wobbling along a very high plateau since March 2023, after the 19% spike that started in May 2021. But in December, the New Vehicle CPI rose by 0.3% to a new high. Year-over-year it was up by 1.0%.
For the years before the pandemic, the new vehicle CPI was also wobbling along a flat line, despite increases of actual vehicle prices. This is the effect of “hedonic quality adjustments” applied to the CPIs for new and used vehicles and also other products (here’s my chart and detailed explanation of CPI hedonic quality adjustments).
The chart shows the price level as index value, not the percentage change:
Used vehicle CPI rose 0.5% for the month, the second month-to-month increase in a row, despite further declines in prices at wholesale auctions where over half of the pandemic-era’s price spike has now vanished. It appears that dealers, who replenish their inventories at these auctions, are successfully trying to fatten their profit margins, and consumers are going along with it. In terms of further progress on the inflation front, that may not be a good sign.
The used vehicle CPI had spiked by 55% from February 2020 through January 2022. Since that peak, it has dropped by 11.1%. And it has given up 31% of its pandemic-era spike.
Food & Energy.
The CPI for food at home – food purchased at grocery stores and markets and eaten off premises – rose by 0.1% month-to-month and by 1.3% year-over-year, on top of already painfully high food prices that had spiked by 24% during the pandemic.
Food at home by category
MoM
YoY
Overall Food at home
0.1%
1.3%
Cereals and bakery products
-0.3%
2.6%
Beef and veal
0.2%
8.7%
Pork
0.3%
0.1%
Poultry
-0.4%
1.2%
Fish and seafood
-0.3%
-1.4%
Eggs
8.9%
-23.8%
Dairy and related products
0.3%
-1.3%
Fresh fruits
0.3%
3.6%
Fresh vegetables
-1.3%
-4.8%
Juices and nonalcoholic drinks
0.5%
3.6%
Coffee
-1.1%
-1.6%
Fats and oils
1.0%
2.3%
Baby food & formula
-0.5%
7.3%
Alcoholic beverages at home
0.4%
1.2%
Energy prices rose for the month by 0.4%, fueled so to speak by gasoline and electricity service, the first increase in three months. Year-over-year, the CPI for energy was still down 2.0%, with most components below a year ago, except for electricity. These are the energy products and services that consumers buy directly.
Energy prices are linked to commodities which tend to jump up and down with wild swings, which is why they’re excluded from “core” inflation measures that attempt to see the underlying inflation trends.
CPI for Energy, by Category
MoM
YoY
Overall Energy CPI
0.4%
-2.0%
Gasoline
0.2%
-1.9%
Utility natural gas to home
-0.4%
-13.8%
Electricity service
1.3%
3.3%
Heating oil, propane, kerosene, firewood
-3.3%
-11.8%
Gasoline, which accounts for about half of the energy CPI, has plunged by 26% since the peak in June 2022.
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