First, a programming note: I’ll post about retail sales later today.

Consumer inflation in April continued essentially to be an interplay between shelter and gas prices, with a side helping of auto insurance and repairs. During late 2022 and early 2023, shelter was still accelerating or steady at a high rate of inflation, while gas prices were falling. Beginning in late 2023, the dynamic reversed, as shelter inflation was slowly decelerating, while gas prices had bottomed. That remained the case in April.

So first, let’s look at the month over month change in headline inflation (blue) vs. inflation less energy (red) and inflation less shelter (gold) for the past two years:

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All three rounded to +0.3% increases in April, about par for the first two for the past twelve months, and above average for CPI less shelter.

On a YoY basis, the trends become clearer, with the increase in gas prices leading to an increase in all items less shelter, steady headline inflation, but a continued deceleration in CPI less energy - which is another way of saying that energy prices have increased, while shelter price gains have continued to abate:

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In particular, shelter has continued to behave as I expected. Here is an update to the 12-18 month leading relationship between house prices (as measured by the FHFA) and Owners’ Equivalent Rent in the CPI:

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House prices are currently increasing at about their average pre-pandemic rate, which has translated to OER and the other measures of shelter inflation to continue to decelerate YoY, but at a slower pace than their initial rapid decline. On a YoY basis, OER has increased 5.8%, a -0.1% decline from its YoY rate in March. Rent of primary residence (not shown) has followed a similar trajectory, currently up 5.4% YoY vs. 5.7% YoY in March. I expect this trend to continue in the coming months.

Although I won’t bother with a graph, the former problem children of new and used vehicle prices have reached a new equilibrium. Used car prices have actually declined -6.9%YoY, including -0.4% in April. New car prices are also down -0.4% YoY.

The remaining problem areas of inflation are:

 (1) food away from home (fading), which peaked at 8.8% YoY just over one year ago, and is now down to a 4.1% increase, close to its pre-pandemic average of 2.5%-3.0%;

 (2) electricity, which has followed gas prices higher, rising from 2.2% YoY last August to 5.1% in April, although it declined -0.1% for the month; and 

 (3) transportation services - mainly car repairs (unchanged for the month, but up 7.6% YoY) and insurance (up 1.8% for the month and up 22.6% YoY!) - which has rocketed from its pre-pandemic range of 2.5%-5.0% to as high as 15.2% in October 2022, and is now still up 11.2%.

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Although I won’t repeat the graph this month, based on the past inflationary period of 1966-82, it is clear that transportation services lags increases in vehicle prices by 1-2 years and even more, sometimes increasing right through recessions

To summarize: if we exclude the well-documented historically lagging sectors of shelter prices and motor vehicle insurance, consumer inflation continues to be well-behaved. To repeat: ex-shelter, consumer prices are only up 2.2% YoY. Any surprises in the month ahead will likely be due to changes in gas prices. If gas prices become well-behaved again, headline inflation should go below 3%

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