Truflation: US Inflation May 2023

Last month, US inflation continued on its downward trajectory, offering proof that the Federal Reserve’s monetary tightening has finally begun to bear fruit. However, the moderate drop from 5% to 4.9% was not pronounced enough to warrant a pause in the rate-hiking cycle and the Federal Funds rates rose once again to 5% - 5.25%.

Truflation’s index is currently showing US inflation at 2.8% (as of June 6, 2023) – significantly lower than the number reported by the Bureau of Labor Statistics (BLS) and edging ever closer to the Fed’s 2% target. With millions of data points measured in real-time, Truflation’s US CPI index is 30 times faster than official numbers, providing a more accurate estimate of US consumer prices.

Our data show downward pricing pressures in the food, utilities, health and apparel prices. These trends mark a reversal from the rapidly rising prices this time last year and will likely lead to a significant reduction in May’s CPI number. However, it’s important to keep in mind that while inflation is dropping on an annual basis, prices are still increasing month-over-month (MoM). As such, it’s too early to declare a victory in the war against inflation.

Graph 1; Truflation Month on Month % Change

Recent inflation and economic data trends

April’s marginal 0.1% CPI drop followed a much more significant decrease in March, when annual inflation dropped from 6% to 5%. In May, the market expects CPI to continue falling, with predictions ranging from 4.8% to 3.9%. Truflation’s data shows that the BLS release will come in at the mid-point of this range at 4.2%.

We expect this strong downward trend will encourage the Fed to hold interest rates at their current level during its next FOMC meeting on June 13-14. While inflation may not have reached the 2% target just yet, other economic indicators suggest that caution is warranted when it comes to further monetary tightening. We see the Central Bank shifting its focus to avoiding a recession, especially with the 2024 election fast approaching.

In particular, several economic indicators point to weakness in the economy. This includes slowing economic growth, which halved from 2.6% in Q4 2022 to 1.3% in Q1 2023 (though this was revised upwards from an original estimate of 1.1%). Total monthly retail sales are also declining year-over-year (YoY), despite a monthly spending increase from $634bn in January 2023 to $680bn in April 2023. In addition, there is mounting evidence that higher interest rates are hurting consumers, with total household debt up by $148bn to $17trn in Q1 2023.

The only data points that will give the Fed pause are the labor statistics. The jobs market continues to run hot despite an increase in unemployment from April’s 3.4% to 3.7% in May. Crucially, wages are also up 5.6% YoY so the average American’s purchasing power is suddenly on the rise again after a long hiatus. This could potentially spell trouble for an economy only just overcoming its inflation problem.

Key drivers of lower inflation

The latest drop in CPI is driven by the food, utilities, health, apparel and gasoline prices. Inflation in these sectors is cooling as a result of easing supply concerns and consumers being more frugal with their spending.

After a recent rise on the back of OPEC’s surprise production cut, crude oil prices are coming down once again. At $70.83 a barrel (as of June 6, 2023), they have fallen 12% YTD, which is alleviating the supply-driven cost pressure.

Graph 2: Price of WTI Crude Oil per barrel

Data Source: Weekly Petroleum Status from the Energy Information Administration

As a result of lower oil prices, as well as the tight labor market, the price of goods has increased by a moderate 1.4% YoY. Conversely, services have seen a much more significant increase of 4.8% YoY.

Given this context, it is not surprising to see that after months of runaway inflation, prices in the food and beverages category are finally experiencing a 0.7% decline YoY. However, while this represents the first decline in years, consumers will still be feeling the pinch as their food bills remain elevated.

This downward price shift is primarily driven by consumers dining out less amid rising costs.

As consumers spend more on groceries, they naturally tend to spend less on dining out. This is a common theme when the economy falters, and while spending habits were not affected by economic conditions as much as expected in 2022, consumers will likely continue to buckle down and eat at home for the foreseeable future.

Retail and food sales have also seen a significant drop in April (+8.3% YoY) versus January (+28% YoY). Despite demand holding steady, food retailers are feeling the pressure to offer more discounts and promotions as commodity prices cool down and competition heats up. This will be eating into their profit margins after a strong performance in 2022.

Graph  3: Truflation Food & Beverages Category Price Trends

Inflation in the utilities sector is also continuing to trend downward, with natural gas, fuel oil and water contributing to the decline. Electricity, which makes up 3.3% of total household expenditure, is the only sub-category still seeing an increase in prices, up 1% between April and May.

Over the coming months, we can expect to see further price depreciation in this category, as general utilities usage declines during the summer months. This expectation is priced into the market, with energy commodities futures currently holding steady or declining.

Graph 4: Truflation Utilities Category Price Trends

The transportation category is a mixed bag. On the one hand, filling up with gasoline is 1% cheaper than a month ago, which is the case across all grades of gas. Coupled with the falling crude oil prices, this is likely to drive overall transportation costs down to pre-pandemic levels. However, overall transportation costs are still 0.53% higher than the previous month.

The apparel category is seeing an MoM price drop, down 0.3% between April and May. This comes despite the relentless rise in commodity prices, especially cotton wool and linen. Rather, this decline appears to be driven by weakening demand, with clothing and accessories retail sales down 4.1% YoY in April, compared to a 10.4% annual increase in January. It’s worth noting, however, that actual monthly sales in this category are still up month-over-month in 2023.

Other sectors seeing deflationary trends are communications, down 0.18% MoM, and healthcare, 0.26% lower MoM. The former is experiencing a price squeeze as competition intensifies, while price drops in the latter category are driven by medical services.

Bucking the trend: Housing & Transportation

So much for the housing market cooling given the higher interest rates; since February, housing prices have surprisingly continued to see an increase. In May, prices are up 0.64% MoM, compounding on top of a 0.45% MoM April increase.

Despite the slowdown in housing prices from late last year, our data is showing that they are starting to edge higher once again, especially for owned dwellings where prices are up 0.5% MoM. The number of house sales has also risen consistently, up from 550k in September to 683k in April 2023.

However, the recent rise in mortgage rates is likely to hit demand for new homes. Evidently, banks are expecting another rate hike from the Fed, so the 30-year fixed-rate mortgage (FMR) has increased to 6.79%, edging closer to the 7% mark.

Overall, though, the biggest driver of higher housing prices is the other lodgings category, which includes Airbnb and hotels. In fact, the revenue generated per available room (RevPAR) for US hotels was 13% higher in Q1 2023 than in Q1 2019. Room rates continue to be the primary driver of this recovery, while occupancy rates remain 2% lower than in 2019.

Graph 5: Truflation Housing Category Price Trends

While oil prices are falling, public transportation costs are up 2% MoM in May, hot on the heels of a 3% MoM rise in April. This follows a crippling 2022 when this sub-sector saw a 20% increase in prices, driven by airline fares and intra-city transportation.

Vehicle purchases are up 22.4% YoY, with the abundance of high-end models leading to fresh headwinds for consumers. Consequently, other vehicle expenses, including insurance and auto financing costs, are also rising. Equally, the number and value of car loans are up in Q1, leading to an overall increase of 0.9% MoM in the other vehicles category.

Graph 6: Truflation Transportation Category Price Trends

We’re also seeing monthly increases in the prices of alcohol, recreation and cultural activities, particularly spending on pets and hobbies.

About Truflation

Truflation provides a set of independent inflation indices drawing on 30+ different data partners/sources and more than 12 million product prices across the US. The indices are released daily, making it one of the most up-to-date and comprehensive inflation measurement tools in the world.

Truflation has been leveraging this measurement tool to predict the BLS CPI number. Since it initiated coverage, two predictions were spot on, with several others deviating by no more than 20 basis points. However, Truflation’s own US CPI index is currently much lower than the government’s reported inflation figure.