Inflation Expands Beyond Supply-Chain Struggles to Service Sector Core service prices jumped in September, driven by shelter, medical care and car insurance.
(…) While costs to transport goods have declined and supply-chain snarls are easing, prices are now rising briskly in services.
Core service prices, which exclude energy, jumped 0.8% in September from August, the Labor Department reported Thursday, driven by shelter, medical care and car insurance. Core goods prices, which exclude food and energy, were flat. For the 12 months ended September, core service prices were up 6.7%, the fastest since 1982. They are now rising faster than core goods prices, which rose 6.6% the same month, down from a peak of 12.3% in February.
Services made up 74% of the 12-month increase in the core consumer-price index in September, the most in 18 months, according to investment bank UBS. That is up from around 50% earlier this year. (…)
Here’s the main table showing the damage: core CPI jumped 0.6% with no change in core goods and a 0.8% gain in core services which follows 6 consecutive rises averaging 0.6%. Why the surprise?
Service-providers have two principal cost components: labor and energy. Core services inflation (blue line below) is intimately correlated with wages. The Employment Cost Index – Wages and Salaries (red) has been accelerating since Q1’21 reaching +5.7% in Q2’22.
Private hourly earnings (black), released monthly, are also well correlated with core services inflation but can suffer from compositional bias like during the pandemic. Interestingly, hourly wages have been decelerating from +5.6% in March to +5.2% in June and 5.0% in September. As I wrote Monday,
Actually, the fact that hourly wages rose only 0.3% MoM in each of August and September, a 3.6% annualized rate, is indicative of restraint on the part of business leaders. Indeed, this table of the last 2-month annualized wage growth rates far from suggests we are near a wage/price spiral (number on left is % of total employment):
- 0.4% Mining & Logging: ……………………….-1.4%
- 10.4% Retail Trade ……………………………… 0.5%
- 16.1% Education & Health Services: …………. 1.0%
- 14.7% Professional & Business Services: ……. 1.2%
- 8.4% Manufacturing: …………………………… 2.9%
- 10.4% Leisure & Hospitality : …………………… 3.6%
- 3.7% Other Services: ………………………….. 4.3%
- 5.0% Construction: …………………………….. 4.4%
- 4.2% Transportation & Warehousing: ………… 7.4%
- 5.9% Financial Activities: ……………………… 8.0%
- 2.0% Information: ……………………………… 14.5%
- 14.2% Governments: …………………………… 5.3% (July/August)
Employees accounting for 50% of total employment saw wage gains of less than 3.0% annualized in the last 2 months. The next 19%: less than 4.5%. Transportation and Warehousing wages should slow down (e.g. FDX, WMT, AMZN); Financial Services will suffer from the bear markets and Information will be impacted by the tech slowdown.
The ECI for Q3 will be out in 2 weeks and, if in sync with hourly wages, it should also decelerate a little to the 5% YoY range. If so, September could be the peak in core services inflation unless energy prices shot up again.
But what about rentflation that everybody is now talking about?
- Inflation’s Storm From the Shelter The Fed can probably look past how housing costs are pushing up inflation, but it can’t ignore everything else
The upward pressure that housing costs have been putting on inflation can now probably be safely ignored. If only there was nothing else going on but the rent. (…)
Part of why prices rose by so much last month was that shelter costs, which account for about a third of the Labor Department’s overall consumer-spending basket and about two-fifths of core spending, rose by 0.7% in September from a month earlier. Excluding shelter, overall prices would have risen a more muted 0.2%, and core prices 0.5%.
And excluding shelter costs, or at least putting less weight on them, seems appropriate. That is because shelter costs largely reflect rents, and the Labor Department’s read on rents is lagging what actual rents are doing.
Rents themselves only account for about 7% of the Labor Department’s consumer-spending basket, since more people own than rent. To measure owners’ shelter costs, the Labor Department uses rent prices to calculate “owners’ equivalent rent”—what it deems people would need to pay if they rented homes equivalent to ones they own. It is somewhat controversial, and even supporters have parroted Winston Churchill’s line on democracy, saying it is the worst way to measure housing costs, except all the others that have been tried.
The issue now, however, is that the Labor Department’s measure of rents reflects what renters at large are paying—both those that have just signed leases, and those that signed them awhile ago. So when rent prices on new leases heat up, it takes time for the Labor Department’s measure to reflect the rise, because it takes time for people’s old leases to come up for renewal. By the same token when rent prices cool, it takes time to show up, too.
And right now, rent prices are cooling. Data from Zillow, for example, show they rose by 0.3% in September from August, which compares with a gain of 1.6% in September of last year. Rent figures from CoreLogic, from property-management-software provider RealPage and from rental marketplace Apartment List all similarly show rent prices moderating. It will take a while for the cooling to show up in the Labor Department’s consumer-price figures, but it will show up.
None of this is a secret—plenty of people, including Fed economists, know all about the lagged effect of rent prices in the inflation data, and additionally shelter costs carry less weight in the Fed’s preferred measure of inflation from the Commerce Department than they do in the Labor Department’s gauge. Looking at inflation excluding shelter costs might cause optics problems for the Fed, but it still makes sense. (…)
- Rents are falling, contrary to CPI data (Axios)
Two reports came out yesterday showing that rents nationwide declined in September from the prior month, Emily writes. And both datasets, from Redfin and Realtor.com, found year-over-year rent growth decelerating.
(…) private-market data from the real estate companies covers new rental contracts only; while CPI captures rents more broadly.
(…) It could take as long as a year for the CPI data to reflect this deceleration, according to research published by the Labor Department last week and tweeted by Summers.
- The authors of the paper conclude that taking a broader measure of rents, as the CPI does, is the right way to understand price growth — but when it comes to monetary policy they’re less sure.
- They seem to imply the Fed might need to watch the private market data to get a sense of where inflation is right now and react accordingly.
Data: Redfin; Chart: Erin Davis/Axios Visuals
Redfin: “The median U.S. asking rent rose 9% year over year in September to $2,002, the slowest growth since August 2021 and the first single-digit increase in a year. September was the fourth-consecutive month in which annual rent growth decelerated, with rents climbing at half the pace they were six months earlier.”
Realtor.com: “The median rent growth across the top 50 metros slowed to 7.8% year-over-year for 0-2 bedroom properties. It is the lowest growth rate in 16 months but is still more than two times faster than the growth rate seen just before the pandemic hit in March 2020. The median asking rent was $1,759, down by $12 from last month and $22 from the peak.”
We have all suddenly become rent specialists, understanding the BLS methods, the leads and lags, the supply of housing and household formations or deformations.
In reality, its all wages, because, at the end of the day, renters can only afford what their wages allow. People trade up or down based on their needs but also, mainly, on affordability. From realtor.com:
- In 2021, the average median monthly household income among the top 50 metros was $6,277 and the monthly median listed rent for rental units with 0-2 bedrooms was $1,553, suggesting rents made up 24.7% of a typical household income. In August 2022, the rent share was 26.4% (vs. 25.7% in August 2021), showing that the nation’s rental affordability has worsened.
- Two-thirds of renters (66.2%) say that rent increases have forced them to consider moving to a more affordable residence.
- While more than seven in ten landlords still plan to raise rent within the next 12 months, the share of landlords planning to raise rent plateaued in July, after increasing from January to April. The amount by which landlords are planning to increase rent also appears to be on the decline. Among landlords planning to raise rent, only one in five landlords (20.8%) plan to raise rent by more than 10%, down from 25.4% who planned to raise rent by more than 10% in April.
This chart plots YoY trends in core services (black) with CPI-shelter (red), CPI-rent (blue) and CPI-OER yellow).
Correlations since 1984 (since 2001):
- CPI-shelter with core services: 93% (92%)
- CPI-shelter with CPI-rent: 86% (93%)
- CPI-shelter with CPI-OER: 98% (97%)
- CPI-rent with CPI-OER: 84% (94%)
This last chart plots CPI-shelter with ECI-wages: correlation: 71%.
We should therefore all focus on wages. The Atlanta Fed wage tracker adjusts for compositional biases. July and August data suggest a peak. Job stayers’ wage growth slowed from 6.1% to 5.3% (3-m m.a.) and the recent big declines in job openings should ease the pressures from switchers.
Mortgage Rates Hit a 20-Year High The sharp rise in borrowing costs, to 6.92% for a 30-year fixed mortgage this week, has cooled the housing market and put homeownership out of reach for many.
Mortgage rates are up from 2.8% in July 2021 to 6.9%, a 410bps jump. Meanwhile, 10Y Ts rose from 1.2% to 3.9%, a 270 bps increase. The spread is at an 18-year peak, above that in the GFC when mortgage risk was substantially higher than now. Looks like QT effect.
- America’s Red-Hot Warehouse Market Shows Signs of Cooling A pandemic-driven boom in warehousing demand is showing signs of slowing, as companies grow more cautious about leasing in an uncertain economy.
- Canada’s Housing Agency Sees ‘Modest’ Recession With 15% Price Drop
- Traders See Bank of Canada Hiking to 4.25% on Hot US Inflation
World Faces New Threats From Fast-Mutating Omicron Variants
Since emerging in late 2021, the highly transmissible omicron strain of SARS-CoV-2 has splintered into a dazzling array of subvariants that are now driving fresh waves of Covid-19 cases around the world. The proliferation of such a diversity of variants is unprecedented, and pits numerous hyper-mutated iterations against each other in a race for global dominance. That’s turbo-charged Covid, making it one of the fastest-spreading diseases known to humanity, and further challenging pandemic-mitigation efforts in a global population already weary of frequent booster shots, testing and masking. (…)
Some mutated strains have acquired both a striking ability to evade antibodies, including those developed to treat Covid, and an enhanced ability to infect human respiratory cells, making them more adept at spreading from person to person. (…)
Although some of the newer omicron variants have caused local spikes in Covid cases, hospitalizations aren’t going up at nearly the same rate they did during previous waves. This suggests that the immunity generated from prior infections and vaccination is protecting against severe illness in some people. Still, even mild infections in vaccinated individuals can lead to long Covid in some cases, which means vaccination alone may not be enough to reduce the long-term health consequences of the pandemic.