Econ Tuesday: Houston, We Have a Problem

The February CPI report courtesy of the Bureau of Labor Statistics is out this morning and not only is inflation sticky, its ticking back up. I envisioned that the White House, upon seeing the report, said, at least silently, the famous Tom Hanks like from the movie Apollo 13 – “Houston, we have problem”. The full report is here: Feb CPI   For a reference to inflation changes by category from January 2020 to January 2o24, see this link: https://www.bls.gov/opub/ted/2024/consumer-prices-up-3-1-percent-from-january-2023-to-january-2024.htm

The headline CPI number rose on annual basis, by 3.2% or .4% for the month.  Core inflation, less food an energy, rose on annualized basis, 3.8% – down slightly from January’s 3.9% annualized rate. What is changing now, no longer helping the picture, is increases in energy. See below.

While across the twelve-month period February YoY, energy remains down, February saw a pretty sharp reversal on gasoline, fuel oil, electricity, and natural gas. Food actual slowed its rate of growth, 0% in February. Shelter or housing costs continued its steady climb, up .4% for the month and 5.7% Year over Year. Since February 2023, each month has seen some increase in inflation.

With energy moving back up, the picture begins to look a bit more like a trend is developing where inflation will remain “sticky”, in my opinion, between 3.5% and 4%.  This means, headline CPI and Core (less food and energy) will begin to converge to a point of greater alignment.  As of recent, Core numbers have remained elevated as the benefit of falling energy prices, particularly gas and heating oil, have helped the CPI number – includes food and energy.

With interest rates high and likely to remain at this level for the near to medium term future, shelter costs will not readily abate, High rates have pushed the residential real estate market to a standstill, causing a supply problem – few homes for sale, somewhat depressed new homes starts.  New construction costs additionally, have driven prices “up” (supply costs, labor costs, infrastructure costs in terms of permits, sewer, water, etc.).

The final nail in the coffin piece for this month’s report is a decline in real wage growth.  This will make political heads turn.  The Washington narrative of late has been that inflation is slowing and real wage growth has been increasing faster than prices. Treasury Secretary Yellen recently said that she wasn’t terribly concerned about inflation because wages were growing. Today’s data drop shows that for February, wages declined .4%.

Recall, that without a decrease below zero in inflation (deflation), inflation is cumulative.  This means that across the past twelve months, the cumulative effect of inflation equals 3.5%.  Average hourly wage changes in the same period equaled 1%. This is a big issue for workers.

What the above means is that any hope for cheaper capital or softening commodity costs for providers need to readjust to later in the year, or maybe longer.  If the picture doesn’t change soon, the Fed will unlikely raise rates but certainly, will maintain rates at the current level for the foreseeable future.