We’re Not Out of the Inflation Woods Yet
The drive toward lower inflation likely hit a speed bump in January.
Next week the Department of Labor will release its report on consumer prices in January. The headline Consumer Price Index (CPI) declined 0.1 percent in December after slowing to just a 0.1 percent increase in November. This has helped move financial asset prices higher on the hopes for something like “immaculate deflation,” a term used for the idea that inflation can come down without a major hit to the labor market or economic growth. It’s unlikely, however, that January will come in as a second consecutive month of deflation.
One reason to expect inflation has accelerated is that the biggest contributor to the decline in headline CPI in December was a drop in gasoline prices. The index tracking gasoline fell 9.4 percent, the fuel oil index dropped 16.6 percent, Brent Crude prices dropped 11.5 percent, and the broader energy index fell 4.5 percent.
This was reversed in January. Data from the U.S. Energy Information Administration shows that gas prices climbed from an average of $3.21 a gallon in December to $3.339, a four percent increase. The American Automobile Association’s gas price tracker shows an increase of 4.4 percent. The average price of Brent Crude climbed from $80.92 in December to $82.50 in January, around a two percent gain. So energy is likely to end up a positive contributor to headline inflation in January.
![LOS ANGELES, CALIFORNIA - OCTOBER 28: The Mobil logo and gas prices are displayed at a Mobil gas station on October 28, 2022 in Los Angeles, California. Exxon Mobil Corp. posted a quarterly profit of nearly $20 billion, the highest quarterly profit in company history amid a surge in oil prices during the quarter. (Photo by Mario Tama/Getty Images)](https://media.breitbart.com/media/2022/11/GettyImages-1437346799-1.jpg)
Gas prices are displayed at a Mobil gas station on October 28, 2022, in Los Angeles, California. (Mario Tama/Getty Images)
The food index was up 0.2 percent in December. Based on our own observations at the grocery store — which admitted are admittedly completely unscientific — the upward trend in food prices and a supply-demand imbalance continued in January. On a recent Sunday afternoon trip to our local big box store, there were no eggs available at all. The Department of Agriculture expects food prices to rise by 7.4 percent this year, which would imply a faster rate of food inflation than what we saw at the end of last year.
The Cleveland Fed’s Nowcast Sees Headline Inflation Rising
The Federal Reserve Bank of Cleveland manages an inflation nowcast, which it describes as a “forecast of the present.” It aims to use the most recently available data to determine what these imply about the movement of prices.
Last month, the Cleveland CPI Nowcast saw headline inflation rising 0.12 percent. While that was an overshoot from the unrounded 0.794 percent decline, it was directionally right in that it indicated a steep decline in the pace of inflation. The forecast for January is for a rise in headline CPI of 0.63 percent, a striking acceleration. Even if we assume another overshoot of thirty or so basis points, this would bring headline inflation back up to 0.3 percent.
We can also look to indicators of underlying inflation in previous months for hints about current and future inflation. The Cleveland Fed’s median CPI was 0.4 percent in December, implying that underlying inflation was stronger than the headline indicated. The 16 percent trimmed mean inflation was also up 0.4 percent.
Core Inflation Boosted by Rising Services Inflation
Core goods prices — which exclude energy and food prices — fell in December and are likely to be down again in the January report. The worse than expected December retail sales figures likely led businesses to attempt to clear inventories by cutting prices. Sales at furniture stores, clothing stores, electronics and appliance stores, and department stores were depressed in December, pointing to lots of January discounting. Despite the rise in wholesale used car prices, this is not likely to show up in the CPI figures in January.
![The Associated Press](https://media.breitbart.com/media/2022/10/wi/ap/auto-prices-cars-sale-road-at-auto-dealership-philadelphia-thursday-sept-29-2022-prices-of-ne.jpg)
Cars for sale line the road at a used auto dealership in Philadelphia, on Sept. 29, 2022. (AP Photo/Matt Rourke)
The indexes tracking services are likely to rise by more than enough to offset the disinflation in goods. Shelter prices will continue to rise, with the expected disinflation in this category still months away due to the term-structure of leases. Airfares, which fell in December, likely were flat to up in January. Car rentals and insurance prices likely rose as well.
The Cleveland Nowcast for core inflation is 0.46 percent. The December estimate was an overshoot at 0.48 percent compared with the Bureau of Labor Statistics’ reported 0.3 percent gain. Assuming a similar overshoot, core inflation should remain around where it was last month.
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