Disinflating shelter prices and deflating gas prices work wonders for January CPI

No, it is not a mistake by putting the title at the head of this post (above) and a second time below. I did not want the AB readers to think I was writing this commentary about January CPI results. This report belongs solely to New Deal democrat. Oh, I did write or report on the January CPI (Just the Facts . . .) down below. A bit of an interpretation as to what is going on with the US economy politically.

What New Deal democrat is giving AB readers is an interpretation of what is going on economically which is surpassing my commentary. Keep in mind two sentences in my earlier commentary.

The so-called K-shaped economy appears to be hitting the middle class harder, said Bank of America Institute Senior Economist David Tinsley.

The K-shaped economy is one in which lower-income people are disproportionately hurt by inflation while high-income households fare better.

Trump has heavily skewed tax breaks to those living in the upper 10 percent in income.

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“Disinflating shelter prices and deflating gas prices work wonders for January CPI”

 – by New Deal democrat

Over the last several years one of my big themes for consumer inflation had been how shelter and gas prices were pulling in opposite directions. After June 2022 gas prices sharply declined, while rents continued to increase just as sharply. By the end of 2024, shelter costs were seriously disinflating (i.e., rising, but at a gradually lower pace), while gas prices were stable or slightly increasing.

Well, today for perhaps the first time since the pandemic, both pulled strongly in the same – beneficial – directions. Beginning in late December, gas prices fell below $3/gallon for the first time since the pandemic. Meanwhile as I wrote on Monday, I expected the disinflation in shelter costs in the CPI to continue – and this morning it did. The result was YoY headline CPI coming in at 2.4%, the lowest except for one month since the pandemic, and core CPI coming in at 2.5%, which was the absolute lowest since the pandemic.

 As an aside, caution is still warranted, however, because the October-November kludge in shelter prices is still present in the YoY calculations, which will probably lower those comparisons by roughly -0.2% through next October.

As per my usual practice for the past several years, let’s start with the YoY numbers for headline inflation (blue), core inflation (red), and inflation ex shelter (gold), which was only up 2.0%:

The good news is that all three of these measures have decreased sharply since Sempteber. This is a significant disinflationary pulse.

As per my comment above, shelter inflation (blue) continued to decelerate YoY, down to a 3.0% increase, with both rent and owners’ equivalent rent increasing only 0.2% for the month. On a YoY basis, rent (gold) was up 2.8% and Owner’s Equivalent Rent (red) up 3.3%, the lowest increase for both since late 2021:

As usual let’s compare that with the YoY% changes in the repeat home sales indexes, which lead by about 12-18 months (/2.5 for scale), to CPI for shelter (blue). YoY home price increases are near or at multi-year lows, each at roughly 1.5%, and shelter inflation has followed (and yesterday we found out that the median price for existing homes had increased only 0.3%). The graph below includes several years before Covid to show its 3.2%-3.6% range during that time:

Not only has shelter inflation declined to back to its pre-pandemic YoY range, it is now *below* that range. Needless to say, this is not only good news, but because of the leading/lagging relationship of house prices to shelter inflation, as I wrote Monday we can expect even further deceleration in the shelter component of inflation during this year.

Another bright spot, as I wrote above, is that gas prices declined -3.2% for the month, resulting in a -7.5% YoY decline, which is welcome news to consumers:

Energy prices as a whole declined -1.5%.

Let’s take a look at a few other areas of interest.

First, new car prices (red) continue to be largely unchanged, flat for the month and up only 0.1% YoY, while used car prices (blue)declined another -1.8%. On a YoY basis new cars are up only 0.2%, and used car prices are *down* -2.0%. The graph below shows the post-pandemic trend by norming both series to 100 as of just before the pandemic:

Both new and used car prices have been basically flat for the past three years. Above I also show average hourly wages for nonsupervisory workers (gold) to show that in real terms, car prices are actually *lower* than just before the pandemic (interest rates for car loans are another issue!).

Every month I check the detailed breakout for “problem children,” I.e., sectors that have increased in price by 4% or more YoY. This month it once again included several minor irritants including non-alcoholic beverages (something that has been very apparent at grocery stores) and tobacco. Another big irritant is hospital services, now up 6.0% YoY. 

Another recent problem child for inflation had been transportation services (blue), mainly vehicle parts and repairs as well as insurance. Of these, only repairs and maintenance (red) are still problematic, as while they only rose 0.1% in January following a -1.3% decline in December, they remain higher YoY by 4.9%:

Electricity prices, which have become a significant problem, likely a side effect of the building of massive data centers for AI generation, declined -0.1% in January, but on a YoY basis are up 6.3%, the highest increase since 2008 except for the shutdown kludge and the immediate post-pandemic inflation. Additionally, piped utility gas increased another 1.0% in January, and is up 9.8% YoY:

As I wrote in the last few months, the electricity issue has already created a backlash, and I expect that backlash to intensify.

In conclusion, this was a tame consumer inflation report, driven by disinflating shelter costs and declining energy costs, although I would continue to treat the YoY headline and core numbers with caution, since they both remain affected (probably by about -0.2%)  by the situation with shutdown shelter kludge. Last month I concluded that “More likely YoY inflation is roughly steady in the 3% range, above the Fed’s target and with employment growth dead in the water.” This month it declined from that range, which would suggest that the weak labor market may also be having an effect. Whether this CPI decline in inflation continues, or is a passing artifact of the sharp recent decline in gas prices, remains to be seen.

The Bonddad Blog

“Expect shelter inflation to continue abating in the next few CPI reports,” Angry Bear by New Deal democrat