THE DAILY EDGE: 15 FEBRUARY 2023: Gimme Shelter!

Annual Inflation Cooled Slightly in January as Pace of Moderation Levels Off Americans paid more for shelter, gasoline and food last month

Still-elevated inflation cooled slightly at the start of 2023 to 6.4% in January from a year earlier, with energy, housing, food and other items keeping some pressure on prices.

The increase in the consumer-price index, a closely watched measure of inflation, edged down from 6.5% in December, the Labor Department said Tuesday. That marked the seventh straight month of easing inflation since peaking at 9.1% in June, the highest reading since 1981.

But the cooling trend is moderating. On a monthly basis, CPI rose 0.5% in January from December, compared with a previous 0.1% increase. (…)

Core CPI, which excludes volatile energy and food prices, rose 5.6% from a year earlier, down from 5.7% in December. (…)

Grocery prices rose 11.3% in January from a year earlier. (…) Restaurant prices, which some economists watch as a signal of labor-cost pressures, increased 8.2% in January, from a year earlier, around the same as the average gain in the second half of 2022. (…)

The latest data “illustrates that inflation is still declining only gradually,” said Andrew Hunter, senior U.S. economist at Capital Economics. “We still expect that downward trend to accelerate soon, as easing goods shortages feed through and housing inflation starts to turn down.”

Composition of US inflation (YoY%)

Source: Macrobond, ING

Gimme Shelter (The Rolling Stones)

           Ooh, a storm is threatening
          My very life today
          If I don’t get some shelter
         Ooh yeah I’m gonna fade away

The media narrative is all about shelter. To wit, from Bloomberg at 9:43 am yesterday:

“It could’ve been worse,” said Stephen Stanley, chief US economist at Santander US Capital Markets LLC, noting declines in used-car prices and airfares. However, “as long as shelter costs are going up as rapidly as they have been, it’s going to be tough to get inflation down anywhere close to where the Fed would like to see it.” (…)

The details of the report showed shelter was “by far” the largest contributor to the monthly advance, accounting for almost half of the rise. Used car prices — a key driver of disinflation in recent months — fell for a seventh month. Energy prices rose for the first time in three months.

Shelter costs, which are the biggest services component and make up about a third of the overall CPI index, rose 0.7% last month. Owners’ equivalent rent and rent of primary residence increased by the same amount, while hotel stays also climbed.

The facts:

• CPI-Used car prices did decline 1.9% MoM, against Manheim’s +2.5% jump (SA). On a non-seasonally adjusted basis, the BLS data was -1.6% vs +1.5% for Manheim which says January data indicate “that the month saw sellers with more pricing power than what is typically seen for this time of year.” Which one is wrong?

• Shelter inflation is unrelenting: +0.6%, +0.8%, +0.7% in the last 3 months respectively for +8.7% a.r. during that period, up from +8.5% and +7.1% in the 2 previous 3-month periods.

• The Apartment List rent index has been declining MoM in each of the past 5 months. A Cleveland Fed analysis found that “new-tenant rents lead official CPI rents by about 4 quarters”.

• The “obvious coming decline” in CPI-Shelter has become the official FOMC narrative, widely echoed by just about everybody. I would humbly submit a few observations:
• Apartment List’s NRI tends to decline in the last 4 months of a year and rise in subsequent months. Coincidences or seasonality?
• The MoM decline in the NRI peaked in November and was only -0.3% in January, a slowing pattern also seen in 2018, 2019, 2020 and 2022. An increase in February or March would be rather inconvenient.
• Since 1953 (828 months), CPI-Shelter has only declined 22 times (2.7% of the times) MoM. Since 1983 (480 months), it has only declined 9 times (1.9%) MoM. Rents are very resilient.
• Since 1953, CPI-Shelter has never declined YoY, except in 2010 post GFC (April 2010 was the worst month at -0.6%!).
• In fact, CPI-Shelter is intimately correlated with rental vacancy rates, a very basic supply/demand reality. This next chart, which plots the 6-month change in CPI-Shelter with the vacancy rate (inverted), suggests that much, if not all, of the current CPI-Shelter inflation is actually explained by the lowest vacancy rate since 1984.

• While it is true that apartment construction rose rapidly in the last 2 years, far outpacing household growth like in the mid-1980s when rental vacancy rates jumped…

• … the very limited increase in single-family housing supply after the GFC has significantly restrained total housing availability…

• …at a time when it is much, much cheaper to rent than to own. Rental demand should thus remain strong for some time:

Fannie Mae estimates that the U.S. is short nearly 4 million housing units while building 1.3M units annually (down from 1.8M one year ago).

The recent sharp jump in mortgage rates totally killed single-family starts (-38% or 500k units/yr in the last 2 years) AND reduced the number of existing homes for sale by 43% or 600k units compared to pre-pandemic levels (per realtor.com) since most existing owners can’t afford to lose their existing low rate mortgage.

In effect, the Fed’s own policies are simultaneously boosting rental demand and exacerbating the housing shortage, a no-fail recipe for higher rents which, ironically, the same Fed wants to see slowing before easing.

• Fed Officials Float Even Higher Rates After Brisk Inflation Data

(…) Richmond Fed President Thomas Barkin, speaking in a Bloomberg TV interview, said that “if inflation persists at levels well above our target, maybe we’ll have to do more.”

Speaking at Prairie View A&M University in Texas, Dallas Fed President Lorie Logan said: “We must remain prepared to continue rate increases for a longer period than previously anticipated, if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions.” (…)

Philadelphia Fed President Patrick Harker, speaking later in the day, said he believes policymakers will need to raise interest rates above 5% and possibly higher to counter inflation that is easing only slowly. (…)

New York Fed President John Williams said Tuesday afternoon that having the federal funds rate in a range of 5% to 5.5% by the end of the year — as listed in Fed officials’ estimates in December — is the appropriate framing.

“I do think with the strength in the labor market, clearly there’s risks that inflation stays higher for longer than expected or that we might need to raise rates higher than that,” he told reporters, following a speech at the New York Bankers Association. (…)

While all Fed officials participate in meetings of the Fed’s policy committee, Logan and Harker are voting members this year and Barkin is not. Williams, as New York Fed president, is a permanent voting member, along with the Fed’s seven governors. (…)

The other bad news for the Fed in the CPI report is that CPI-Services ex-shelter jumped 0.8% MoM (+7.2% YoY) in January after 3 very subdued months. While wage increases have slowed below 4.5% a.r. in recent months (+5.1% YoY in January), energy costs jumped 2.0% MoM (+8.4% YoY).

Today we get January Retail Sales. Americans are still fighting high inflation on “essentials”, up 0.8% MoM (8.4% YoY):

Oil Demand to Hit New Record This Year as China Reopens, IEA Says The energy watchdog raised its forecasts for oil demand this year to a record level, as China fueled a surge in air travel and Russian production remained surprisingly resilient to Western sanctions.

Strong dollar fuels wave of emerging market currency devaluations