Headline CPI slowed to 6.42% y/y, its sixth consecutive month of decelerations. The rate of change accelerated to the downside over the last three months. The month-to-month delta in the year-over-year percent change moved from a -46-basis point deceleration in October versus September to -65 basis points in November versus October and -70 basis points in December versus November. The December print was the quickest step down on a rate of change basis since April 2020. Energy came in at 7.02% y/y and has also decelerated over the last six months after hitting 41.54% in June. On a rate of change basis, y/y price growth in energy has slowed sequentially by -223 basis points, -463 basis points, and -600 basis points over the last three months. Food prices accelerated 10.42% y/y, but it has slowed on rate of change basis over the last four months.
While inflation will likely remain elevated in 2023, the rate of change could continue to decelerate. Headline CPI will be facing increasingly difficult comparisons as the y/y growth rate accelerated 7.53% in January 2022 to 9% in June 2022. There is a similar setup in Energy and Food which is highlighted between the vertical red lines in the charts below.
Core CPI decelerated to 5.69% y/y from 5.96% in the prior month, marking its third consecutive rate of change slowdown. Shelter accelerated 7.48% y/y and contributed 247 basis points to headline inflation. Within Shelter, Owners’ Equivalent Rent accelerated 7.53% y/y. This measure of home price inflation has increased sequentially every month since March 2021. However, the S&P Case-Shiller House Price Index has continued to decelerate from its peak in March 2022. OER tends to lag Case-Shiller’s peaks and troughs by twelve to eighteen months, so Shelter will likely continue to keep upward pressure on Core CPI through at least the first half of 2023.
Market-based indicators of inflation have also slowed. The 5-year and 10-year breakeven inflation rates are at 2.18% and 2.17%, respectively. This suggests the market is not positioning for sustained accelerations in inflation.
Given the tougher comparison set and decline in market-based indicators of inflation, it is likely that CPI will slow down on a rate of change basis through the first half of 2023. However, the absolute level of prices will likely continue to negatively impact consumers creating a slowdown in demand.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Economic Analyst
Boyd Watterson Asset Management, LLC