ISMS 10: US CPI Could Decline to 4% By YE23; Unless QE Revs Up

Mar 20, 2023

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Is US CPI going up or down by yearend 2023?

Feb 2023 US CPI was 6%, down from 6.4% in Jan and off its June 2022 peak 9.1%

Food accounts for 13.5% of CPI and was a high 9.5% in February

Food has come off its Aug 2022 11.4% peak

Energy accounts for 7.1% of US CPI and was up only 5.2%

Energy has come down considerably from its 41.6% June 2022 peak

When oil price rises, it causes a similar, but muted rise in the US CPI energy component

Correlation between oil price and the energy component of CPI is about 90%

Food and energy are a tiny part of US CPI, 79% of the weight comes from all other items

Non-food and energy items are less volatile and total CPI is coming back down to that level

This less volatile and slow to adjust group of products and services illustrates why I was previously arguing that overall CPI was unlikely to come down fast

Most volatility in US CPI comes from the energy component, which accounts for only 7% of CPI

The largest impact on the food category is “Food at home” which was up 10.2%

This is coming from supply chain pressures that take a long time to work through

Though high, food at home peaked in August 2022’s 13.5% high and has fallen 3ppts

Food away from home never was exceptionally high and as a result is slowly falling

Energy is 7% of US CPI and is broken equally into commodities related and services

Commodities is related to the oil and gas that Americans buy
Energy services show how energy costs feed into the price of electricity that individuals and businesses pay

Gasoline prices were the main driver and at its peak in Jun 2022 was up 60%

Biden’s first drawdown of emergency oil stockpiles from the Strategic Petroleum Reserve was in November 2021, just before the election

In 2022, Biden released 222 million barrels of oil from the Strategic Petroleum Reserve

This 38% reduction increased worldwide supply and helped bring down oil price

21% of CPI comes from products like cars and cars, which were only up 1%

The cost of homes is the largest part of the US CPI at 34% and it was up 7.3%

Services excluding energy services is mainly comprised of owner's equivalent rent

OER is still slowly adjusting up as a result of the rise in home prices
This accounts for 30% of CPI and will take months to adjust down

Oil price moved from US$39/bbl in Oct 2020 to US$82/bbl 12 months later

The peak was US$114/bbl in June 2022

US housing price were rising at 5% per year since 2012

They shot up 12% in 2020 thanks to the Feds near zero interest rates
Then they went up a massive 18% in 2021
30-year fixed mortgage rate hovered around 3% from July 2020 to October 2021. Now 6%

Summary

Feb 2023 US CPI was 6%, down from 6.4% in Jan and off its June 2022 peak 9.1%
Food accounts for 13.5% of CPI and was a high 9.5% in February; “Food at home” was up 10.2%, showing lingering supply chain pressures
Energy is a small component of US CPI and was up only 5.2%, down considerably from its 41.6% June 2022 peak
The correlation between oil price and the energy component of CPI is about 90%, so with oil prices down, US CPI is down
Biden’s 38% drawdown of the Strategic Petroleum Reserve in November 2021, just before the election, increased worldwide supply and helped bring about that oil fall
Oil prices feed slowly into the price of electricity; hence energy services were up 13.3% and will be slow to fall
79% of the weight comes from ex-food and energy items, which is much less volatile
Cars, apparel, and the like are about 21% of CPI was only up 1%
The cost of homes is the largest part of the US CPI at 34% and it was up 7.3%, comprised mainly of owner's equivalent rent which have slowly adjusted for rising home prices and is not yet reflecting the fall in home prices
US housing price were rising at 5% per year since 2012 and then shot up 12% in 2020 thanks to the Fed’s near zero interest rates, then prices rose a massive 18% in 2021
30-year fixed mortgage rate hovered around 3% from July 2020 to October 2021. Now 6%
It will be many months before the slowdown in the mortgage will be reflected in US CPI

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ISMS 10: US CPI Could Decline to 4% By YE23; Unless QE Revs Up

Is US CPI going up or down by yearend 2023?

Feb 2023 US CPI was 6%, down from 6.4% in Jan and off its June 2022 peak 9.1%

Food accounts for 13.5% of CPI and was a high 9.5% in February

Food has come off its Aug 2022 11.4% peak

Energy accounts for 7.1% of US CPI and was up only 5.2%

Energy has come down considerably from its 41.6% June 2022 peak

When oil price rises, it causes a similar, but muted rise in the US CPI energy component

Food and energy are a tiny part of US CPI, 79% of the weight comes from all other items

Non-food and energy items are less volatile and total CPI is coming back down to that level

Most volatility in US CPI comes from the energy component, which accounts for only 7% of CPI

The largest impact on the food category is “Food at home” which was up 10.2%

Though high, food at home peaked in August 2022’s 13.5% high and has fallen 3ppts

Energy is 7% of US CPI and is broken equally into commodities related and services

Gasoline prices were the main driver and at its peak in Jun 2022 was up 60%

In 2022, Biden released 222 million barrels of oil from the Strategic Petroleum Reserve

21% of CPI comes from products like cars and cars, which were only up 1%

Services excluding energy services is mainly comprised of owner's equivalent rent

Oil price moved from US$39/bbl in Oct 2020 to US$82/bbl 12 months later

US housing price were rising at 5% per year since 2012

Summary

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