The huge news of the day is that inflation is coming way down from its pandemic peaks. The June CPI technically just came in with a 2-handle; consumer prices were up just 2.97% from last June, and well below the 9.1% peak inflation rate a year ago.
Now, I'm not one to downplay a cumulative 12% rise in prices over the past two years. It's nothing to celebrate. But the real question for the Fed, for investors, for consumers, for the whole U.S. economy, is where the inflation rate is going from here.
And to my eye--and the way it looks to markets--inflation looks much tamer from here. The biggest culprits holding up the CPI now are housing costs (although rents and home prices are clearly moderating), and idiosyncratic things like car insurance prices. In fact, if you strip out housing, a.k.a. "shelter," from the CPI, the index would only be up 0.5% year-on-year, according to Barry Knapp of Ironsides Macroeconomics.
Car insurance is another factor keeping the CPI elevated right now, even as categories like meat prices, dairy, utility bills, used car prices, and airline fares all declined last month. Allstate just hiked car insurance premiums by 40% in Georgia; other providers want 30% hikes in California, and premiums nationwide were up 17% year-on-year as of May, according to The Wall Street Journal.
The reason? It all goes back to the pandemic, of course. The surge in demand for cars sent prices soaring, and insurers hadn't budgeted for that price spike. So when claims came in, they had to pay out way more than previously expected; State Farm, for instance, posted a $13 billion underwriting loss on autos in 2022, the Journal notes; it lost 28 cents on every dollar written last year. Yikes.
The increases haven't slowed yet; auto insurance prices surged 1.7% last month just from May, today's CPI report showed. That's keeping not just the headline CPI elevated, but also the all-important "services less shelter and energy" gauge that the Fed is focused on, which was up 3.4% year-on-year in July.
Policymakers are trying to use that narrower measure to glean how much the tight labor market is fostering continued high inflation economywide. But soaring car insurance prices are actually an unrelated one-off that will eventually subside. In other words, if you strip out this measure as well, "super-core" inflation is running lower than feared right now.
This easing, combined with the broader cooling of the labor market, weak manufacturing reports, and moribund leading indicators--not to mention the deeply inverted yield curves--would all seem to suggest the Fed take a break from additional interest rate hikes for now. Sure enough, the 10-year Treasury yield has backed well off of the 4% level it hit again last week; and tech stocks are leading the market's rally today.
Especially with China closer to deflation than inflation right now, there is a far weaker case for persistently higher U.S. inflation than we have widely been told to believe.
See you at 1 p.m!
Kelly
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