Throughout 2022, there was much debate on whether inflation measures would continue to accelerate toward record growth rates. Since the middle of last year, we have been discussing our view that inflation would likely slow on a rate of change basis as the comparison set got tougher and consumer demand decelerated. Last week we received more data in support of that view.
On the consumer side, the Consumer Price Index decelerated to 5.99% y/y in February, down from 6.35% last month, marking its eighth consecutive month of deceleration. The Headline number is now 2.94% below its cycle high, and the comparison set remains difficult through June. Core CPI was relatively unchanged on a rate of change basis at 5.53% y/y compared to 5.56% last month. The Core number is 1.11% below its cycle high from September 2022. Unlike Headline CPI, Core CPI’s comparison set eases through July.
Given the large contribution from Shelter prices (and an easing comparison set for 2Q23), we have discussed the probability that Core CPI would likely decelerate at a slower pace than Headline CPI. The primary driver of Shelter prices is Owners’ Equivalent Rent which tends to lag more current home price measures. One of those measures is the S&P Case-Shiller Home Price Index which peaked in March 2022. There is evidence from prior cycles that OER has lagged S&P Case-Shiller home prices by twelve to fifteen months from peak-to-peak. Using that as a guide, we would expect to see OER slowdown on a rate of change basis by year-end which should begin to reverse the positive contributions to Core CPI.
The big takeaway from the slowdown in consumer prices is its reflection on consumer demand. On a y/y basis, real average hourly earnings have been negative for twenty-two months in a row. That negative setup is likely driving a deceleration in real spending (despite large increases in consumer credit usage) and causing prices to come down.
Turning to the producer side, the Producer Price Index decelerated to 4.59% y/y from 5.71% last month. Headline PPI is now 7.00% below its cycle peak from March 2022. Core PPI decelerated to 4.45% from 5.01% last month, now sitting 5.23% below its cycle peak from March 2022. Without digging into the components and sticking to the bigger picture, this deceleration is another sign of a demand slowdown.
Within trade price data, we saw additional evidence of a weakening demand setup. Import prices declined 1.05% y/y, and export prices declined 0.85%. This was the first negative print for the former since December 2020, and the first negative print for the latter since November 2020. Importantly, the comparison set gets tougher in March on the import side while the export setup remains difficult through June.
Across consumer, producer, and trade prices, we are seeing evidence of a demand slowdown. This deceleration has negative implications for global economic activity as we move through the first half of the year.
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