Pro Perspectives 7/10/24





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July 10, 2024

With the June CPI report due tomorrow morning, let's revisit the two hot spots in the report.

As we've discussed here in my daily notes, both auto insurance and owner's equivalent rent make up about 30% of the CPI.  Both have been propping up the overall index, and the Fed's current restrictive interest rate policy is powerless to bring them down.
Above is motor vehicle insurance.  This has risen at a 20% year-over-year rate for six consecutive months (the actual data is represented by the blue bars). 
At 20%, it's adding more than half a percentage point to year-over-year consumer price index. 
The good news:  In the last inflation report, the monthly change in auto insurance prices declined for the first time in 29 months. 
But even if this auto insurance index were to flat-line from this point (i.e. zero month-to-month change in this insurance price index), it would still take five months for the year-over-year measure to fall below double-digits (that scenario represented by the orange bars in the chart above).
So, even if the insurance hikes are over, this year-over-year measure will continue to put upward pressure on the inflation data for months to come. 
The Fed knows this, and this dynamic continues. 
Next let's revisit the heavier weighted component that's been propping up CPI:  Owners' Equivalent Rent (which is also influenced by the sharp rise in insurance rates).
This makes up 27% of the consumer price index.  And you can see in this chart below, it has directly contributed at least 1.5 percentage points to the year-over-year change in CPI for 23 consecutive months.  The orange bars represent the path IF this component were to flat-line over the coming months (zero monthly change).  

This too, will continue to put upward pressure on CPI for the months ahead. 


But if we look at the national rent index from Apartment List, which has one of the most extensive databases of apartment rental listings, the rent inflation story is very different


As you can see, Apartment List has rent inflation peaking in late 2021 (the purple line), and turning to rent deflation in the middle of last year.  The government's calculation on rents is simply lagging — it's old data. 


And the old data is giving the illusion that inflation is "sticky" at higher levels.