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After reaching a peak of 9.1% YoY in June 2022, US Consumer Price Index (CPI) slowed over the past few months, falling below 5% YoY in April. Proxies and leading indicators suggest the downward normalization should continue in the short term with CPI is still on track to be around 3% YoY in June 2023.
 

1. US CPI Shelter Growth Hit A Peak In March

Market rents will remain contained in the coming months. Household formation and rental demand are slowing in response to deteriorating macro conditions. In the meantime, housing supply will gain traction, with a peak expected around 4Q23/1Q24. Latest data show multifamily units under construction reached a new record high in April 2022. The collision of these factors will probably result in a contraction of market rents on a YoY basis soon.

🇺🇸 #Housing #Inflation #Fed | US Market #Rents’ Growth Could Turn Negative Soon https://t.co/iM7dYKdL0I

— fastreveal (@fastrevealnews) June 5, 2023

In the past, the CPI’s measure of rents for homeowners has typically lagged other measures because of data construction. As a result, the Shelter component of the Consumer Price Index (CPI) basket, and particularly the Owners’ equivalent rent of residences (OER) component, should normalize downward in the coming months adding downward pressure on headline inflation. 
 

2. Food Prices Growth Should Ease Sharply

Proxies also point to a downward normalization of food prices’ growth by the end of 2023. Agricultural commodity prices — which are usually leading CPI food prices by 12 months — retraced over the past few months. In addition, fertilizer prices — another leading indicator — are also down ~50% YoY.

3. Core Good Prices Will Keep Easing On a YoY Basis

For a few months, supply chain disruptions have eased significantly. Several indexes point to a return to normal. In the meantime, wholesalers of finished goods have faced a rebound in inventories due to weak real consumption and will probably keep implementing discounts.

4. Gasoline Prices Have Contributed Negatively Since March 2023

On a YoY basis, gasoline prices have become a drag on CPI YoY headline since March 2023. The base effect reversed significantly (from positive to negative) and should hit a maximum in June 2023 (if prices remain unchanged).

5. CPI Services (Less Rent of Shelter) Growth Could Ease Slowly

There are also signs CPI Services (less rent of shelter) growth could ease slowly on a YoY basis. This component is more sensitive to the labor market. Wages growth already peaked, reaching the smallest pace since June 2021 in May 2022.

🇺🇸 MCT Update: #Inflation Persistence Declined Significantly in April - FRBNYhttps://t.co/8KOwZx4yyG pic.twitter.com/PVYyeVD7Av

— Christophe Barraud🛢🐳 (@C_Barraud) June 2, 2023

6. Market Expectations

In this context, market participants already expect CPI YoY to slow markedly by June 2023 with swaps pointing to a level slightly below 3%.

Bottom line: There are more and more signs that US CPI will keep slowing and should be close to 3% YoY in June. This development should offer Fed some reason to keep interest rates steady in June. Note that next CPI figures (for May) will be released on June 13, one day before the FOMC meeting.

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