MNI INTERVIEW:US Inflation Likely At Turning Point-SF Fed Econ
San Francisco Fed economist says alternative signals of rents show better picture of inflation.
The U.S. economy may be shifting into an environment where sky-high inflation is finally poised to turn lower, led by softening core goods prices, San Francisco Fed economist Adam Shapiro told MNI.
"There's a good probability based on my read that we're at a turning point right now in terms of where the inflation numbers are going and where the economy is headed. We're not seeing it at all in the labor market but we know from past experience that the labor market can just turn on a dime," he said in an interview.
While stressing current "indicators are all showing that inflation is still high," Shapiro said that despite some remaining kinks supply chain bottlenecks have come down a lot. "It certainly looks like the supply chain pressures that were very, very strong last year are behind us now," he said.
The Labor Department last week reported a softer-than-expected 0.4% headline CPI increase over the month of October with core prices increasing less than expected. The headline producer price index rose 0.2% last month, below expectations, and core PPI, at a 0.0% change month-over-month in October, was at the lowest level since November 2020.
"Based on our current trends over the last two or three months, it looks like there's a signal of softening happening in the goods market," said Shapiro, a vice president in the San Francisco Fed's research department.
"When you look under the hood, what's actually driving most of the CPI now are the service categories, and then within that it's rent inflation," Shapiro said.
Core CPI eased to 6.3% in the year to October from its peak of 6.6% the previous month, its highest since 1982. Rent has soared 7.5% over the year and owners' equivalent rent increased by 6.9% and are likely to worsen before starting to improve due to BLS methodology, he said.
"It can actually take up to two years for this whole process to actually filter its way through into the CPI stock of rents," he said, pointing to his research with San Francisco colleagues. "The fact that new lease price inflation was really, really high last year is still feeding through to the service Price Index of CPI and PCE now."
"New lease prices take time to filter through to the stocks," he said. (See: MNI INTERVIEW: US CPI Rent Costs To Gain Momentum - Fed Economist)
Shapiro pointed to an analysis from former Council of Economic Advisors chair Jason Furman that updates core CPI by swapping in spot rents on new leases for all rent on existing leases and shows core CPI at a 2.8% annual rate over the last three months versus 5.8% for the official BLS measure.
"If you want to get an accurate picture of what is the inflationary pressure right now and what's causing that then there are certain indicators that you might want to look at over and above others," Shapiro said. But a tight labor market and elevated wage growth will likely prevent pressure on core services prices from evaporating entirely, he said.
If "I start to see core goods inflation continue to go down and then I see the spot readings on rent really start falling more then I'll say, 'Okay, this is looking like it's really coming off now,' he said. "By next year, if I see that rent inflation is still high, but everything else is low, I'll say, 'Okay, I think we're at a point now where inflation is where we want to be.'"