US CPI Preview: January 2024 (plus the impact of the CPI weight update on the 2024 outlook)
CPI disinflation is expected to continue in January, with headline CPI growth expected to fall below 3% YoY, to the slowest pace seen since March 2021.
Headline CPI growth expected to fall below 3% YoY
In what would be another major milestone in the current disinflationary cycle, I expect headline CPI growth to fall to 2.9% (2.89%) YoY in January, down significantly from the 3.4% recorded in December.
This is in-line with the consensus forecast of 2.9% and would mark the slowest rate of growth in headline CPI inflation since March 2021.
Core CPI expected to record a tenth consecutive month of disinflation
For the core CPI, I expect growth to fall to 3.7% YoY (3.68%), down from 3.9% in December.
This is in-line with the consensus forecast of 3.7% and would mark the tenth consecutive month of moderating YoY growth, to the lowest level seen since April 2021.
Shown below, is a chart of my historical monthly forecasting track record to two decimal places, versus the actual CPI data and consensus:
Both headline and core CPI growth expected to fall further below 2% YoY on a spot market rent adjusted basis
Given the lagging nature of the CPI’s rent based components, and their huge CPI weighting, in order to see the full extent of the disinflation that’s occurred in the US, it’s necessary to adjust the CPI for underlying spot market rents — I do this by using rental price data from both Apartment List and Zillow, in a simple weighted average.
For January, I expect headline CPI growth adjusted for spot market rents to fall to just 1.3% YoY (from 1.6%) and core CPI growth adjusted for spot market rents to fall to just 1.6% YoY (from 1.8%).
The impact of CPI weight revisions on my recently updated medium-term US CPI forecasts
While many were focused on the BLS’ recent revisions to their seasonal adjustments, the more important update was the change to CPI weights.
In summary, there has been a significant reduction in the weight applied to durables (10.3% vs 12.1% for the December CPI report) and a significant increase in the weight applied to services (64.0% vs 62.3% for the December CPI report). Nondurables categories have seen a modest increase (25.7% vs 25.6% for the December CPI report).
Given that durables prices have been seeing significant deflation, and that recent durables price trends have weakened further, the new CPI weights result in slight upward revisions to my latest medium-term US CPI forecasts, which were published on 30 January.
The impact of the weight adjustment on my medium-term headline US CPI forecast, is an increase to YoY growth estimates of 0.1% across February to December. A YoY growth rate of 2% is now expected to be hit in September (previously August).
For the core CPI, the weight adjustment has resulted in similar upward revisions, though with some months seeing YoY growth revised higher by a rounded 0.2%. Instead of the core CPI being estimated to fall to 2% YoY in December, the weight revision results in a revised December estimate of 2.1%.
Note that this update has been provided purely to illustrate the impact of the revised CPI weights on my current medium-term US CPI forecasts, which were published on 30 January — i.e. this illustration does not incorporate any underlying price change assumptions that have been made to my CPI model, since publishing the latest medium-term US CPI forecasts on 30 January.
Given that I currently intend to update my medium-term US CPI forecasts on a quarterly basis, I next envisage releasing an update to my medium-term US CPI price forecasts, post the release of US CPI data for March.
Also note that my CPI forecasts are not impacted by the BLS’ adjustments to seasonal factors, as I build my forecast on non-seasonally adjusted data, and conduct my own adjustments for seasonality based upon historical averages.
Some key trends to monitor in January’s CPI data
Falling prices for both new cars and wholesale used cars, puts pressure on retail used car prices to do the same
Over the past several months, a significant decline in wholesale used car prices (as per the Manheim Used Vehicle Value Index) and CPI new vehicle prices, has been seen. At the same time, CPI used car and truck prices have remained relatively resilient.
In terms of the specifics, wholesale used car prices have declined by 8.0% from October to January, while CPI used car and truck prices have fallen by just 0.6% from October to December.
This has resulted in the gap between retail (CPI) and wholesale (Manheim) used car prices blowing out further over the past two months, after a material divergence between these two indexes also occurred from June to August.
Given the inherent link between wholesale and retail prices, it is unlikely that such a large gap will continue for a prolonged period — instead, wholesale prices will likely rise significantly, retail prices will likely fall significantly, or some combination of the two will occur.
Pointing towards the gap bridging primarily via a significant decline in retail used car prices, is the material weakening seen in new car prices over recent months, which suggests that there has been a major shift in the supply and demand dynamic within the US automotive market, over recent months.
Over the past three months, CPI new vehicle prices have recorded MoM declines, with MoM price changes sharply below their respective historical averages.
This marks a major reversal of the above average MoM price growth that was recorded for seven consecutive months from March to September, with relative MoM price growth falling to the weakest levels seen since at least March 2010, on a 3-month moving average basis.
Given this backdrop, it will be important to monitor whether downward price pressure across much of the US automotive market, begins to spillover to used car prices in January.
CPI’s rent based measures expected to disinflate further, as underlying spot market rents continue to fall
Both the Apartment List Rent Index (ALRI) and Zillow Observed Rent Index (ZORI) continued to decline in January, with the pace of price declines again exceeding their seasonal average.
This marks 10 consecutive months of relatively lower MoM growth for the ALRI (versus its respective 2017-19 average) and four consecutive months of relatively lower MoM growth for the ZORI (given that the ZORI has a longer history, this is versus its respective 2015-19 average).
Given these persistently weak price trends, the average YoY growth rate of the two indexes, remained at 1.2% in January, which is sharply down from the February 2022 peak of 16.9%.
Given the major disinflation that’s occurred in underlying spot market rents, the CPI’s rent based measures — being owners’ equivalent rent (OER) and rent of primary residence (RPR — which lag underlying spot market rents, are expected to build on the disinflation that began in 2023, during 2024.
While I expect a continued deceleration in price growth to occur over the months ahead, given that OER and RPR are not only lagging, but smoothed in nature, the deceleration in price growth, is likely to remain gradual.
In January, I expect YoY growth in OER and RPR to moderate to 6.1% (from 6.3%) and 6.1% (from 6.5%), respectively.
The ideal backdrop has been set for a moderation in motor vehicle insurance price growth — will initial signs of disinflation occur in January?
Two items that significantly contributed to upward pressure on the CPI in 2023, were the CPI motor vehicle maintenance and repair, and the CPI motor vehicle insurance categories, which rose by 7.1% and 20.3% YoY respectively, in December.
While both rising significantly in 2023, the motor vehicle maintenance and repair category has shown major disinflation over recent months — MoM price growth was negative in December, marking the first MoM decline seen since March 2022, while price growth has been below its respective historical average in three of the past four months.
As a result of these recent trends and a high prior comparable, I expect annual price growth to moderate significantly in January, to 5.8%.
In contrast to the recent disinflationary trend in CPI motor vehicle maintenance and repair costs, CPI motor vehicle insurance prices continue to record stubbornly high growth — this is evidenced by annual price growth hitting a new peak in December, reaching its highest level since December 1976.
Though with ongoing declines in wholesale used car prices now combining with recent declines in new vehicle prices and disinflating motor vehicle maintenance and repair costs, the backdrop has shifted to one which should support a major moderation in motor vehicle insurance price growth during 2024. This makes motor vehicle insurance prices an important component to watch over the months ahead, including for any potential disinflationary signs in January.
Will the volatile recreation services and other personal services categories show further signs of disinflation in January?
After a huge MoM rise in December, the CPI recreation services component remains a key area to watch in January.
While tentative disinflationary signs were seen several times during 2023, they were routinely followed by a sharp rebound in price growth, which saw wide fluctuations between very strong relative MoM growth and relatively weak MoM growth.
While I expect YoY growth to remain elevated at 5.6% YoY in January, given the significant and deepening disinflation that’s being seen in the US, and an M2 money supply that remains relatively constrained, I eventually expect tentative disinflationary signs to shift to a more enduring period of disinflation, making this an important category to watch over the months ahead.
In a similar manner to CPI recreation services, the CPI other personal services category has also seen mixed disinflationary signals, with relative monthly price growth fluctuating significantly during 2023.
Though over the past three months, price growth has shown renewed signs of disinflating, which makes January’s data particularly important — should a fourth consecutive month of relatively more moderate price growth be seen, then this would strongly suggest that a new, more moderate growth trend, would now be in place.
Please note, the consensus forecasts for January changed post the original publishing of this US CPI Preview. This report has been revised to reflect the updated consensus expectations (headline of 2.9%, from 3.0% and core of 3.7%, from 3.8%).
Thank you for reading my latest research piece — I hope that it provided you with significant value.
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What is up with owners equivalent rent v. Rent of primary
Thanks again for your valuable work Steven, I read on your website that the impact of medium-term CPI weight revisions is an increase in year-on-year growth estimates, but if the weight of the services component increases, which If I'm not mistaken, it has yet to show most of its deflationary effects, I would expect an early rather than delayed achievement of the target, as its possible greater decline compared to the durable goods component would bring greater benefits to the annual trend. Where am I wrong?