With retail oil prices falling in the US, annual CPI inflation is likely to continue to decline sharply in the US in August, perhaps to below 8%, argue Stefan Gerlach and GianLuigi Mandruzzato in this Macro Flash Note.
On 13 September US CPI inflation for August will be released. After reaching 9.1% in June, it fell to 8.5% in July. Chairman Powell stated in his Jackson Hole speech on 26 August that a one-month decline in CPI inflation is not enough for the Federal Reserve to question its outlook for US monetary policy, but a series of positive inflation surprises is likely to do so. Much attention is therefore focused on the August release.1
One important driver of CPI inflation has been energy prices, which constitute 9.2% of the US CPI and which rose 32.9% between July 2021 and July 2022. A large part of energy is gasoline prices, which have a weight of 5.2% and rose 44.0% in the year to July 2022. That these components contributed to the decline in inflation between June and July this year is clear: energy prices fell by -4.5% and gasoline prices by -7.7% on a monthly basis.
Gasoline prices at the pump are readily observed and are collected weekly by the US Energy Information Administration.2 We therefore know that average gasoline prices fell by -12.8% between July and August. The direct effect on this decline is thus to reduce the CPI by 0.7%. This suggests that the annual CPI inflation will fall further in August to perhaps 7.8%.
The chart below shows annual CPI inflation and the change in gasoline prices over 12 months. As it is clear, while gasoline prices experience swings of much greater magnitude, the two series are very strongly correlated (correlation = 0.84).
Source: FRED and US Energy Information Administration, data as of 1 September 2022.
To use the gasoline price data to produce an estimate of CPI inflation in August of this year, we develop a simple statistical model.3 As the chart below shows, that model yields a forecast of annual CPI inflation of 7.7% and a monthly inflation rate of -0.3%.4 (A 67% confidence band is for annual inflation of 7.61% - 7.94% and monthly inflation of -0.17% - -0.47%.)
Source: FRED, US Energy Information Administration and EFGAM calculations, data as of 1 September 2022.
Other factors also point to a moderation of inflation in August. The price of used cars, which accounts for 4.1% of the US CPI and which has been a major contributor to rising inflation over the past several years, fell 3.6% month-on-month in the first half of August according to the Manheim Used Car Index, further unwinding the increases reported since early 2021. In addition, retail companies have recently complained of excessive inventory levels and hinted at discounting prices to wind them down.
To conclude, the chances are that lower energy prices and the unwinding of some of the trends that pushed up US CPI since the beginning of 2021 will lead inflation to fall for a second consecutive month in August.
1 See https://www.federalreserve.gov/newsevents/speech/powell20220826a.htm
2 See https://www.eia.gov/petroleum/gasdiesel/
3 The model views monthly CPI inflation as depending on last month’s CPI inflation, and the percent change in gasoline prices in this and last month. It is estimated on data from January 2000 to July 2022.
4 The BLS’s annual inflation rate is based on seasonally unadjusted data and is 9.1% in July. Our annual inflation rate is based on seasonally adjusted CPI data and is 9.0% in July.
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