But there will be no adjustment to the Fed-favored “core PCE” price index due out before the next Fed meeting.
Let’s start with inflation in services today because almost two-thirds of consumer spending ends up in services, so this is the problem. And some extra special things happened in the services CPI in October.
What was to come on November 10th was discussed for the past few weeks in the Wall Street Journal and elsewhere, and it came as no surprise: a massive mega-adjustment by the Bureau of Labor Statistics in the CPI for health insurance. And it came on November 10.
Everyone knows that health insurance costs haven’t plummeted in October since September. But due to periodic adjustment, the health insurance CPI plunged 4.0% in October from September, a change of 6.1 percentage points from September (+2.1%), according to data from the Bureau of Labor Statistics. from today. This was by far the largest month-over-month drop in the BLS data since 2005, and it far exceeded adjustments in previous periods:
The CPI for health insurance represents 0.9% of the general CPI and 1.1% of the basic CPI. And the crash of November 10 pushed down the general index, and even more so the core CPI and the services CPI.
Inflation in health insurance is difficult to calculate because numerous factors change, not only the premium but also copays, deductibles, out-of-pocket maximums, what is covered and what is not covered, etc., and there are all types. of insurance plans out there.
So the BLS uses a different method of estimating price changes, the “retained earnings method,” which the BLS explains hereand about once a year, you have to adjust the index as more data becomes available.
Normally, the annual adjustment isn’t that big, but this time, the adjustment was huge.
The adjustment will be carried forward over the next 12 months, which means that the health insurance CPI will be negative on a month-to-month basis for the next 12 months to reduce the overstatement of the last 12 months.
Year-over-year, the health insurance CPI was still up 20.6%, but the year-over-year increases will slow dramatically over the next 11 months. It was also negative from month to month from August 2020 to August 2021.
This chart shows the value of the index, which will continue to fall for another 11 months, until the next adjustment:
But there is no adjustment for the Fed’s favorite “core PCE” index..
The Fed uses the “core PCE” price index as the yardstick for its 2% inflation target. This “Basic PCE” price index uses a different and broader methodology, and is compiled by a different government agency (the Bureau of Economic Analysis), and calculates health insurance inflation differently, and there will be no adjustment.
It is the lowest index that the government produces, and we can disregard it, but it is the most important inflation index for the Fed, and this “core PCE” price index will not be adjusted in October. It will be published on December 1, just before the next Fed meeting.
The services CPI rose 0.4% in October from September, less pronounced than the previous month’s 0.8% rise, thanks to the massive adjustment in the health insurance CPI.
In this chart of month-over-month changes in the Services CPI, notice the big ups and downs from month to month, so you can’t draw conclusions just by looking at one month:
In year-on-year terms, the CPI for services increased by 7.24%, just slightly less than in September (+7.38%). Both are the worst since August 1982.
Without the health insurance adjustment, October’s annual increase would have set a new four-decade record.
CPI for services by category
The table shows the main categories of the services CPI in order of change from month to month, from the greatest increase (hotels and motels) to the greatest decrease (medical insurance). More on the CPI for Housing Rent and Owner’s Rent Equivalent in a moment:
|Hotels and motels||5.6%||6.4%|
|Postal and delivery services||3.6%||4.2%|
|motor vehicle insurance||1.7%||12.9%|
|Tickets to movies, concerts, sporting events||0.8%||-1.9%|
|Principal residence income||0.7%||7.5%|
|Maintenance and repair of motor vehicles||0.7%||10.3%|
|Video and audio services, cable||0.7%||3.2%|
|Owner’s Rent Equivalent||0.6%||6.9%|
|Other personal services (dry cleaning, haircut, legal services…)||0.4%||5.8%|
|Pet services including veterinarian||0.2%||10.7%|
|Water, Sewer, Garbage Services||0.0%||4.8%|
|Car and truck rental||-0.5%||-3.5%|
|health care services||-0.6%||5.4%|
Core CPI, which excludes food and volatile energy products, rose 0.3% in October from September, less than the previous month’s 0.6% rise, thanks in part to a massive insurance tightening.
Year over year, the core CPI rose 6.3%, along with several other months this year, the worst since 1982.
The CPI for all items rose 0.4% in October from September, the same as the previous month, and 7.7% year over year, a slowdown from October.
The CPI for “food delivery” – food bought in stores and markets – jumped 0.6% in October from September. Prices in some categories that had skyrocketed are now falling from month to month, like beef. But others, like eggs, are being re-injected. The Whac-A-Mole inflation game.
Year over year, the CPI for food at home rose 10.9%, less dire than the 13% jump in September.
|Fats and oils||2.1%||23.4%|
|Cereals and cereal products||0.8%||15.9%|
|Juices and non-alcoholic beverages||0.5%||12.7%|
|Alcoholic beverages at home||0.5%||3.8%|
|Food in general at home||0.4%||12.4%|
|fish and shellfish||0.0%||7.4%|
|beef and veal||-0.1%||-3.6%|
|Dairy and related products||-0.1%||15.5%|
The CPI for “Eating away from home”– restaurants, vending machines, coffee shops, snack shops, etc. – soared 0.9% in October from September and 8.6% year-on-year, the worst since 1981.
The energy takes off again
After falling in September, the CPI for energy products and services increased 1.8% in October from September, due to higher gasoline prices and higher heating oil prices. Year over year, the CPI for energy increased by 17.6%:
|General CPI for energy||1.8%||17.6%|
|Home Natural Gas Utility||-4.6%||20.0%|
|Heating oil, propane, kerosene, firewood||10.5%||44.2%|
Housing costs go up
The CPI for “housing rental”, which represents 32.3% of the total CPI, tracks housing costs as a service, not an investment asset. Its main components:
“Rental of habitual residence” (representing 7.4% of the total CPI) jumped 0.7% in October from September. Year over year, it jumped 7.5%, the highest since 1982 (red in the chart below). Track the actual rents paid by a large panel of tenants, even in rent-controlled apartments.
Other rental indices, including the Zillow Rent Index, are based on “asked rents,” which are the advertised rents that landlords want to charge prospective tenants.
“Equivalent rental of the owner of the residences” (representing 24.0% of the total CPI) jumped 0.6% in the month and 6.9% year over year (green line). Tracks the costs of homeownership as a service, based on what a large panel of homeowners report for renting their home.
house prices have started to fall month-over-month, according to the most recent Case-Shiller home price index (purple line in chart below), which cut the year-over-year gain to 13.0%.
The red line represents the “owner equivalent residence rent”. So given how this worked out last time, it will be interesting to see how it plays out.
CPI for durable goods
The CPI for durable goods fell for the second month in a row, finally after peaks last year and earlier this year. Year over year, it was still up 4.8%, down from the 18% range earlier this year.
|Information technology (computers, smartphones, etc.)||-1.0%||-10.8%|
|Home furnishings (furniture, appliances, floor coverings, tools)||-0.8%||7.6%|
|Sporting goods (bicycles, equipment, etc.)||1.6%||3.0%|
Used Vehicle Retail Prices Aren’t “Sinking” or Whatever
Retail prices for used vehicles are barely down from the ridiculous high they shot to in December 2021, and have largely remained stuck in the stratosphere. although wholesale prices are falling:
Publisher’s note: The bullet points in this article were chosen by the editors of Seeking Alpha.