• calendar_month December 14, 2022
• folder Ecomomy

Inflation slowed in November as consumer prices grew by a mere 0.1%, according to the Bureau of Labor Statistics, slower than expected. As we often remind readers, a single month doesn’t make a trend, but taken together, prices have risen by an annualized rate of just 2.5% over the past five months, which is rather close to the desired pace of inflation targeted by the Federal Reserve.

Moreover, while inflation is 7.1% higher than a year ago, much of that growth came from December 2021 to March 2022 — so the year-over-year figures will likely moderate over the next few months, barring any unexpected event.

Food and energy costs boosted overall inflation over the past year, but these are falling back to earth. Energy prices were 13% higher in November than a year ago but fell by 1.6% during the month. Prices of both groceries and restaurant meals rose by 0.5% over the month while being 8.5% and 12%, respectively, higher than a year ago. Core inflation, which excludes these more volatile categories, ticked higher by just 0.2% in November.

Travel costs eased slightly in November after seeing outsize gains over the year. The price of transportation services, such as airfares and car rentals, which tend to lag oil prices by several months, fell by 0.1% in November. Prices for lodging away from home fell by 0.7%.

One area that attracts a lot of attention is the contribution of housing costs to the price index. Shelter costs account for about one-third of overall inflation and rose by 0.6% in this latest report, even as the housing market is starting to cool and month-over-month prices and rents are slipping. Owners’ equivalent rent, which is a measure of how much a property owner would have to pay in rent for their home, accounts for almost a quarter of inflation and rose 0.7% over the month, while actual rents, accounting for 7% of the index, stepped 0.6% higher.

The disconnect between shelter costs as reflected in the consumer price index and what is occurring in the broader housing market offers some guidance as to how the price index is likely to behave in coming months.

Asking rents for apartments peaked earlier in the year, according to CoStar, but they appear to lead primary rents as tracked in the index by about eight months. This is largely due to the difference in rent data collection. The consumer price index collects current rents in a sample of rental units every six months. Since apartment dwellers typically sign yearly leases with rents fixed during the lease term, the index fails to detect more frequent rent changes that prevail from tenant turnover in the market. CoStar, on the other hand, collects daily data of tens of thousands of apartment properties, capturing real-time rent observations.

Thus, the consumer price index's rent component should take a while to catch up to current market conditions. For example, after the start of the pandemic, apartment rent growth slowed to 0.5% in September 2020 before accelerating through March 2022. However, the rent component of the index decelerated through May 2021 and accelerated through November. If the index's rent growth continues to lag apartment rent growth by eight months, then November might have marked the peak in rent growth according to the consumer price index and we should see this turn over in coming reports.

Several other inflation measures also show prices moderating in November and suggest that the trend will continue to slow in the coming months. Wholesale prices grew by 0.3% as measured by the producer price index for final demand. While final demand draws the headlines, wholesale prices further down the production line, particularly for goods, are showing more softening due to the easing of supply chain backlogs and energy costs, which began to fall midway through the year.

The price of final demand for goods grew by 0.1%, and prices for processed intermediary goods, which tend to lead prices of final goods, fell by 0.9% in November after dropping by 0.1% in September and October. Even further down the production line, prices of unprocessed intermediate goods fell by 3.2% in November after tumbling by 10.5% in October.

On the services side, prices for final demand grew by 0.4%, while prices of intermediate demand of services grew by 0.6% in November. These prices are more closely tied to labor costs, which have been growing at around a 5% annual pace.

Another sign that inflation should moderate is reflected in households’ expectations of the future path of inflation. The median consumer expectation for inflation a year from now has fallen from 6.8% in June to 5.2% in November. Households also feel better about the longer-term future. The median expectation for inflation three years ahead ticked lower to 2.9% and has been in pre-pandemic range — below 3% — since August.

What We’re Watching …

Consumers have been pretty downbeat this year as inflation and recession risks weigh on sentiment, but last week’s consumer sentiment survey from the University of Michigan showed households are still expecting to see higher incomes and lower interest rates next year. This could support stronger consumer spending through the end of the year, but don’t hold your breath.

The retail sales report for November coming this week could reveal a pullback after October’s hefty lift, as consumers exhaust pandemic-related savings and lean more heavily on credit, which should become more costly as interest rates continue to climb higher.

CoStar Economy is produced weekly by  Christine Cooper, managing director and chief U.S. economist, and Rafael De Anda, associate director of CoStar Market Analytics in Los Angeles.