Tracking Progress on Inflation

To begin with, here are some general thoughts on inflation dynamics in the United States.

Markets have shown heightened sensitivity to CPI releases lately which is perhaps warranted given the recent guidance from FOMC that absent further progress on disinflation, policy rates may have to be kept restrictive for longer. What is the current state of inflation and its trend?

Latest CPI print for saw sizable revisions in Seasonal Adjustment Factor. Per BLS: “Each year with the release of the January CPI, seasonal adjustment factors are recalculated to reflect price movements from the just-completed calendar year. This routine annual recalculation may result in revisions to seasonally adjusted indexes for the previous 5 years.” Consequently, some stats cited here can be slightly different with respect to the stats cited earlier.

Consumer Price Index (CPI):

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Headline CPI:

Headline CPI has been reaccelerating each quarter since Q3 last year and the trend continued with the latest print. On a Seasonally Adjusted Month-over-Month Annualized basis, Headline CPI was 5.6% in Jan. This is an acceleration from a short-window 3-mo moving average (sma) 4.4% and long-window 12-mo moving average (lma) 3%. For context, post-Global Financial Crisis (GFC), it averaged 2.6%, running at 1.8% pre-Covid (starting 2009 till 2019 inclusive) and 4.1% post-Covid (starting 2020), indicating a significant pick-up in Headline CPI in the post-Pandemic era.

Note: unless explicitly stated otherwise, all inflation numbers cited here use revised estimates for SA MoM Ann indices, which I prefer over YoY time series for my analysis to better capture rapidly evolving short-term trends.

Core CPI:

Core CPI, which excludes the impact of changes in Energy and Food prices, has been fairly sticky last year hovering approximately between 3.5% and 4.5% except for a short period of time between May and July last year when it was decelerating meaningfully. After showing signs of improvement last month, Core CPI reaccelerated to 5.4% in Jan. This is a significant acceleration from 3.8% sma and 3.2% lma. For context, post-Global Financial Crisis (GFC), it averaged 2.5%, running at 1.9% pre-Covid and 3.9% post-Covid, indicating a significant pick-up in Core CPI in the post-Pandemic era.

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Digging a bit deeper:

Core CPI: Core Services:

Core Services CPI has been somewhat sticky although decelerating since late 2022, but had a meaningful reversal this month. Core Services CPI was 6.2% in Jan. This is an acceleration from 4.3% sma and 4.2% lma. For context, post-Global Financial Crisis (GFC), it averaged 3%, running at 2.4% pre-Covid and 4.3% post-Covid, indicating a significant pick-up in Core Services CPI in the post-Pandemic era.

Core CPI: Core Goods:

Core Goods CPI has been in the deflationary mode since mid 2023, but had a meaningful acceleration in the month of Jan. Core Goods CPI was 3.4% in Jan. This is an acceleration from 1.8% sma and -0.1% lma. For context, post-Global Financial Crisis (GFC), it averaged 1.1%, running at 0.3% pre-Covid and 2.7% post-Covid, indicating a significant pick-up in Core Goods CPI in the post-Pandemic era.

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Core Services: Shelter:

With intermittent periods of exception, Shelter inflation has been somewhat sticky for some time, but had a meaningful pick-up in Jan reversing the deceleration seen in Dec. Shelter CPI was 4.5% in Jan. This is an acceleration from 3.9% sma and in line with 4.3% lma. For context, post-Global Financial Crisis (GFC), it averaged 3.1%, running at 2.4% pre-Covid and 4.7% post-Covid, indicating a significant pick-up in Shelter CPI in the post-Pandemic era.

Note:

• We have seen sharp acceleration in Shelter inflation this month on a MoM basis although on a YoY basis it decelerated slightly as last year’s Jan print, which was rather hot, fell of the radar in the YoY calc.
• We have seen sharp deceleration in this category back in Jun (2.7%) and Sep (3.2%) last year only to see a reacceleration in the following months and following the print last month, we had contemplated if “deceleration in Dec may follow the same pattern” of reacceleration in subsequent periods.

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The primary sources of reacceleration in Shelter inflation in Jan were Lodging Away From Home and Rent of Primary Residence whereas the core driver of deceleration in Shelter inflation in Dec was Lodging Away From Home.

Lodging Away From Home is a fairly small component of Shelter CPI, but the change in this component was rather large in magnitude coming in at 17.6% in Jan. This is a acceleration from 14.1% sma and 2.2% lma. For context, post-Global Financial Crisis (GFC), it averaged 2.2%, running at 1.4% pre-Covid and 4% post-Covid, indicating a significant pick-up in Lodging CPI in the post-Pandemic era. Lodging inflation is generally quite volatile and has become increasingly spikier since mid-2017.

Inflation in Owner’s Equivalent Rent (OER), which is the largest component of Shelter CPI, was 3.8% in Jan. This is in line with 3.5% sma and a deceleration from 4.5% lma. For context, post-Global Financial Crisis (GFC), it averaged 3.1%, running at 2.4% pre-Covid and 4.8% post-Covid, indicating a significant pick-up in OER CPI in the post-Pandemic era. Inflation in OER has been moderating steadily since early 2023 and has maintained that trend despite a meaningful pick-up in volatility since early 2024.

Inflation in Rent of Primary Residence, which is the second biggest component within Shelter inflation, printed 4.2% in Jan. This was a bit higher than 3.6% sma in line with 4.2% lma. For context, post-Global Financial Crisis (GFC), it averaged 3.4%, running at 2.8% pre-Covid and 4.8% post-Covid, indicating a significant pick-up in Rent of Primary Residence CPI in the post-Pandemic era. Inflation in Rent of Primary Residence has also been moderating steadily since early 2023 and has maintained that trend despite some discernible pick-up in volatility since early 2024.

• Shelter inflation can be somewhat misleading in a volatile pricing environment as its largest components Rent of Primary Residence and OER both can lag the current market pricing levels by about a year.

Core Services: Medical Care Services:

Medical Care Services inflation was 0.3% in Jan. This is a deceleration from 2% sma and 2.7% lma. For context, post-Global Financial Crisis (GFC), it averaged 2.9%, running at 3.1% pre-Covid and 2.4% post-Covid, indicating a drop in Medical Care Services CPI in the post-Pandemic era.

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• Post-Covid decline in healthcare inflation stands out as healthcare inflation tended to be consistently higher than the overall CPI in the pre-Covid era. Generally, there is a delay in price adjustments in this sector as healthcare providers and insurer contracts tend to have long duration.? In addition, lower utilization immediately after Covid was a likely factor for the lower inflation in post-Covid period. Despite legislations, such as the Inflation Reduction Act (IRA), it remains to be seen whether the recent trend of healthcare inflation lower than broader inflation can persist going forward.

Core Services: Transportation Services:

After a visible pick-up in Dec, Transportation Services inflation was 14.7% in Jan. This is an acceleration from 11% sma and 3.1% lma. For context, post-Global Financial Crisis (GFC), it averaged 3.3%, running at 2.3% pre-Covid and 5.3% post-Covid, indicating a significant pick-up in Transportation CPI in the post-Pandemic era.

Within Transportation Services, Airline fares have been accelerating rapidly in the recent past. CPI inflation in this category was 14.8% in Jan. This is high, but represents a lower pace of acceleration relative to the sharp pick-up in Dec. This is a deceleration from 17% sma, but an acceleration from 7.1% lma.???For context, post-Global Financial Crisis (GFC), it averaged 0.9%, running at 0.2% pre-Covid and 2.3% post-Covid, indicating a significant pick-up in Airfare CPI in the post-Pandemic era.??

Core Goods: Vehicles:

With the exception of the past couple of months, a disinflationary trend was forming in New Vehicles since early 2023 and that disinflationary trend resumed in Jan. ?

A deflationary trend was on its way for Used Cars & Trucks since early-2022 although there were some intermittent flare-ups (e.g. Q2 2023). That deflationary trend has reversed since in Q4 last year and the newly forming inflationary trend persisted in Jan.

• New Vehicles inflation was 0.4% in Jan. This is a deceleration from 3.5% sma although slightly above -0.3% lma. For context, post-Global Financial Crisis (GFC), it averaged 1.9%, running at 1.0% pre-Covid and 3.8% post-Covid, indicating a significant pick-up in New Vehicles CPI in the post-Pandemic era and has been normalizing in the recent past.

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• Used Cars & Trucks category has a slightly lower weight than New Vehicles in CPI. For Used Vehicles, inflation was 26.3% in Jan. This is an acceleration from 17% sma, and is much higher than 1.1% lma. For context, post-Global Financial Crisis (GFC), it averaged 2.5%, running at 0.9% pre-Covid and 5.9% post-Covid, indicating a significant pick-up in Used Vehicles CPI in the post-Pandemic era. Although inflation in Used Cars & Trucks has moderated since early 2022 through Q3 last year, it was accompanied by much higher volatility even before the reacceleration since late last year.

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• It is interesting to note that New and Used Vehicles have shown high level of contemporaneous sensitivity to changes policy rates most likely due to the dependence on short term consumer-financing where rates and spreads both get adjusted rather quickly to reflect macro policy regimes. This is unlike pricing in many other parts of the economy, such as Housing, that may display long and variable lags in responding to rate changes. The recent past Fed pivot seems to have kicked off a new period of reacceleration in Used Vehicles pricing.

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Food and Energy are excluded from the Core CPI measure due to their higher volatility. However, these are items that consumers pay for on a regular basis and thus can have high influence on consumers’ perception of inflation.

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Headline CPI: Food:

Food inflation was 4.3% in Jan. This is in line with 3.7% sma but an acceleration from 2.4% lma. For context, post-Global Financial Crisis (GFC), it averaged 2.6%, running at 1.6% pre-Covid and 4.9% post-Covid, indicating a significant acceleration in Food inflation in the post-Pandemic era.

Headline CPI: Energy:

Energy inflation was 13% in Jan. This is a deceleration from 14.3% sma and but an acceleration from 0.9% lma. For context, post-Global Financial Crisis (GFC), it averaged 3.3%, running at 2.4% pre-Covid and 5.4% post-Covid, indicating a significant acceleration in Energy inflation in the post-Pandemic era.

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• Normalization in Food and Energy prices along with other goods such as New and Used Vehicles was a big driver behind decelerating Headline inflation in Q2, Q3 last year.
• While goods inflation has decelerated, price levels are much higher than the pre-Covid era. Anchoring to pre-Covid price levels are likely driving public dissatisfaction higher which was widely discussed as a campaign issue last year.

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*numbers are approximate; source: FRED, BLS; as of: Feb-2025