Inflation may not recede in a straight line
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Pretty much all the important data has been pointing to inflation receding through the final months of 2022.
- Yet as we await 2023's first major reading on prices, there are some warning signs the pathway toward low inflation may be bumpier than advertised so far.
Driving the news: The Bureau of Labor Statistics will publish the CPI data at 8:30am ET tomorrow. Consensus analyst forecasts suggest overall inflation will spike to 0.5% in January, from 0.1% in December, but core prices — excluding food and energy — will be steady at 0.4%.
- Year-over-year, inflation is expected to recede to 6.2%, from 6.5%, with core down to 5.5% over the past 12 months, from 5.7%.
Yes, but: There is no certainty that inflation's glide path, evident during the second half of 2022, will continue in a straight line. Any resurgence could trigger another round of hawkish signaling from the Federal Reserve and disrupt markets.
The intrigue: One surprising piece of evidence on inflation trends came Friday, when BLS released new seasonal CPI adjustments.
- Normally, this is a non-event. The agency makes technical changes based on the latest evidence of how prices typically change over the course of a year, then applies those adjustments going back five years.
- But this year, with a hyper-focus on inflation trends, the results were notable. The agency said inflation was a bit lower in the first half of 2022 than originally reported, and a bit higher in the second half.
- The changes aren't huge — only a fraction of a percent per month — and year-over-year numbers are unaffected. Yet it does suggest the apparent deceleration in 2H of 2022 was not quite as pronounced as originally reported.
Meanwhile, there are other warning signs out there that disinflation may not happen in a straight line.
- For example, used car prices have fallen for six straight months, helping pull down overall inflation. But the private-sector Manheim used vehicle price index showed a 2.5% rise in January.
- More broadly, as the pandemic-induced supply chain snarls recede in the rearview mirror, the prices of physical goods may stop falling and no longer act as a disinflationary force.
- While private-sector measures of rents have been stable or falling recently, there are typically long delays in how changing market conditions in housing affect government inflation data.
The bottom line: All signs are that the economy started 2023 on a high note, but the flip side of that may be a harder task wrestling inflation down than seemed likely a few weeks ago.
