The Bureau of Labor Statistics (BLS) reported that its seasonally adjusted Consumer Price Index – Urban Consumer (CPI) rose by 0.4 percent over the month of August, a significant acceleration from the 0.1 percent month-over-month increase in July. Prices of energy commodities, gasoline in particular, rose by 6.1 percent over the month after treading flat in July. At the same time, shelter costs, which include both rent of primary residence and owner-occupied rent, increased by 0.5 percent in August, from 0.1 percent in the previous month. Meanwhile, core inflation, which excludes the more volatile food and energy prices, also accelerated, rising by 0.2 percent in August, faster than the 0.1 percent recorded in July.
Gas and shelter prices accounted for the majority of the overall contribution to month-over-month inflation. However, while energy prices’ contribution to consumer prices is largely through the price change channel, shelter’s impact on house prices mostly occurs through the relative weight channel. Shelter represents the largest component of the CPI so small increases in shelter prices can have large impacts on consumer price growth overall.
NAHB tracks rental prices in the CPI, a component of the Shelter Index, and compares the rental price level with the overall price level that excludes energy and food prices, core-CPI. Over the month, rental prices rose by 0.4 percent. Since rental price growth exceeded overall inflation as measured with core-CPI, then “real” rental prices also rose in August. The figure below illustrates that real rental prices have been growing since 2013.
The monthly increases in energy commodities and shelter prices reported in this month’s release also helped to push the 12-month change in the overall price level up to 1.9 percent in August, from 1.7 percent in July. A standard Phillips Curve model posits that inflation (∏t), measured as the twelve-month change, is equal to an additive combination of inflation expectations (∏e), the current unemployment rate relative to an estimate of the natural rate of unemployment for the US economy (- a(U-U*)), and an unrelated variable that incorporates all other price shocks (v), such as a shock in energy prices. If we assume that inflation expectations are “adaptive” that is, consumers’ view of inflation in the future is essentially its rate in the recent past, then the acceleration in inflation is related to labor market conditions, which is the current rate of unemployment relative to an estimate of its natural rate, and an unrelated shock variable, such as energy prices.
∏t = ∏e – a(U-U*) + v; ∏e = ∏ t-1
∏t – ∏t-1 = – a(U-U*) + v;
Interpreting this release of consumer prices then within a Phillips Curve framework with the accompanying assumptions suggests that energy prices contributed to acceleration in inflation. At the same time, previous NAHB analysis indicated that unemployment rate is below its natural rate, suggesting it also may have contributed to faster inflation. However, we would expect the impact on inflation from current labor market conditions to be more broadly evident. Despite acceleration in shelter prices, core-inflation, which measures changes in the CPI excluding volatile energy and food prices, remained virtually unchanged over the month at 1.7 percent.
This line of reasoning suggests that the acceleration in inflation reported by the BLS is more likely due to the energy price shock. Since energy price volatility is typically short-lived, then its impact on changes in inflation would be transitory. The temporary nature of energy price shocks suggests that today’s release has not changed the current relationship between inflation and the labor market. However, the acceleration in core-inflation over the month will be monitored closely to see whether it emerges in the 12-month change calculation.