The CPI often does not always follow the PPI. Let's investigate why that is.

CPI and PPI from the BLS, chart by Mish

Sometimes the CPI and PPI move in the same direction but sometimes not. A discussion came up yesterday regarding PPI lead times and the CPI.

I put together a series of charts, including the one above, but first let's look at a few Tweets.

Central Banks Have More Work to Do 

"Core inflation momentum to start '23 does not indicate a swift return to 2% anywhere in the developed world. Instead stabilizing at ~5%".

PPI Lag

"Headline CPI to fall below 4% briefly but on current "under the hood" indicators likely move back towards 4.5%-5% range just on stable Oil."

Oil."

I am not convinced there is a PPI lag. If oil prices go up prices at the pump go up right away. The lag, may be the other way. Prices at the pump are slower to come down than they rise.

Core Is Sticky

Other than the period 1971-1981, the Core CPI did not follow the PPI in either direction until recently. 

One obvious reason the core does not closely follow the PPI is the core excludes food and energy. But why is the core so stable?

CPI and Shelter vs PPI 

Shelter makes up 34.5 percent of the CPI. Rents tend to rise slowly stabilizing the core. The exceptions were 1971-1983 and 2021-2023.

Rent has been on a tear, otherwise the CPI year-over-year would be plunging must faster.

The core (excluding food and energy) comprises 79.5 percent of the CPI. That makes shelter 43,4 percent of the core. 

CPI Month-Over-Month Shelter 

Price of Shelter

Shelter has gone up at least 0.5 percent for 14 consecutive months dating to January 2022.

The shelter index increased 8.2 percent over the last year, accounting for over 60 percent of the total increase in all items less food and energy. 

The CPI is not going to stabilize with these consistent increases.

Mish Shelter Flashbacks

• Oct 31, 2022: Rent Prices Have Declined Two Straight Months, But What Does It Mean? Rent prices are declining month-over-month but don't read too much about inflation into the decline.
• December 8, 2022: Ignore the Pundits, Don't Expect Big Declines in the Price of Rent. The price of rent appears to be falling rapidly. But some of that is seasonal, the rest is likely a mirage.
• January 5, 2023: National Rent Prices Decline Again, But Reports Are Very Misleading. Apartment List reports the fourth consecutive drop in apartment rent prices but that may not translate to your next lease.
• February 2, 2023: National Rent Prices for New Leases Drop for the 5th Month. The price on new apartment leasers declines again, but when do existing renters get a break?
• On March 7 I asked The Fed Chair Puts a Spotlight on Rent, Has Rent Really Stabilized?

False Dawns 

National Rent Price data from Apartment List, CPI data from the BLS, chart by Mish

All these "rent is declining" false dawns have been wrong for three reasons.

1. They are based on new leases, not existing leases.
2. They report increases all at once whereas the BLS smooths things out over a 12-month period due to the fact that not all leases renew in the same month.
3. Seasonality

In the months ahead we may finally see rents ease due to the fact there are a record number of apartments under construction. Just don't expect to see declines.

Meanwhile, the price of crude has taken off. Don't expect energy to be another big savior in the April CPI report.

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