Econ Tuesday: CPI Report Out, Heat Still On

Welp, it’s Fat Tuesday and the King Cake isn’t any cheaper compared to last year. Nothing in today’s January CPI report bears good news for senior living or healthcare providers as the headline inflation number was up .3% from December and 3.1% Year over Year. The Core (all items less food and energy) rose 3.9%. Soft energy prices, somewhat attributable to a mild winter and lower heating costs (fuel, natural gas, propane) due to softer demand along with lower gasoline costs, have kept the headline number more in-check. The full report is available here: CPI January 2024 Report

Some quick highlights (or better, lowlights) from the report are,

• If energy were simply neutral, inflation would be running around 3.7%. The biggest driver, and it is the heaviest weighted element in the CPI basket is housing or shelter. Shelter is up 6% Year over Year.
• Food continues to be sticky high but primarily driven by food away from home or restaurants.  The contributor here is commodity prices but more so, labor costs.  The scarcity of labor for restaurants requires higher wages and thus, higher prices for meals eaten out.
• Medical care rose .5% in January with the hospital component increasing 1.6% for January and physician services, increase .6%.

• Cumulatively, since January 2021 (most of the economy re-opened by this period), inflation is up 18%.  Unfortunately, nominal wage growth is only up 12.6%
  • In January 2021, average hourly wages were $30.50 per hour.  In December 2023, average hourly wages were $34.35 per hour.
  • Average weekly hours paid, fell Year over Year as did real weekly wages in January.

What we can glean from this report is that inflation is not yet under control.  It has moderated but the key drivers of shelter and services inflation (6% and 5.4% respectively) are not sensitive to interest rates or rate policy, especially services inflation.  Shelter costs have a parallel track typically as increases in mortgage rates reduces the supply of homes available for sale, raising the cost or price.  Mortgage rate increases also shift housing demand to apartments or rentals, raising the cost of rent.

For providers, especially senior living and post-acute, this report tells me that 2024 continues to look tight and the seas, choppy.

• The Fed may not raise rates but certainly, a rate cut is not likely, soon.  Credit costs will remain high and credit, access tight.  This includes all debt markets – banks and bonds.
• Valuations will remain stagnant and might, trend down just a tad. This will continue to adversely affect the M&A outlook.
• Energy costs are helping but the question remains, for how long.  Gasoline/petroleum inventories are low and recently, prices have ticked up.  If we see a push upward for refined products, the same will eventually trend into prices and inflation may get hotter.  If such is the case, interest rates could click up if the Fed feels the need to cool the fire or certainly, stay elevated (where they are) longer.
• For organizations that rely heavily on a fluid, fairly liquid residential real estate environment (CCRCs), the outlook remains poor for housing sales.  Rates will remain high, credit terms the same and because so many current owners are locked into sub 3% mortgages, moving up or to a different home is impractical.  This hurts the supply available for sale and keeps prices higher. Seniors that need to sell to move may find buyers scarce.  Most use their home resale and the net proceeds for the source of funds for entry fees.