May CPI: Used Car & Truck Prices Up 4.4%!

Yes, but energy prices fell by 3.6% month-to-month and food prices were up only 0.2%. Used motor vehicle prices account for only 2.75% of the CPI while food and energy prices account for 20.30% of the CPI. Typically each month some consumer prices rise and some prices fall. That is why when we try to measure the overall change in consumer prices we use a weighted price index, the weights being determined by the estimated relative importance of the different items purchased by a representative household.

Let’s look at the annualized percent changes in the All-Items CPI over one month, 3 months, six months and 12 months, which are plotted in Chart 1. As of May 2023, the annualized percent change in the CPI was 4.13%, 3.17%, 2.20% and 1.50% over 12 months, six months, three months and one month, respectively. In May 2022, these changes were 8.50%, 9.21%, 9.69% and 11.62%.

Do you get my drift? After pouring accelerants on the inflationary sparks caused by Covid, the Fed’s subsequent suppression actions are now extinguishing the previous conflagration. (Can you tell my son is a professional firefighter?) Given the lags between suppression actions and actual suppression, the inflationary flames will continue to be extinguished.

The inflationary suppression acts that the Fed finally started administering in 2022 have manifested themselves in the slower growth in a version of what I call thin-air credit (drink). The blue bars plotted in Chart 2 are the 12-month annualized percent changes in the sum of total commercial bank credit (loans, leases and securities), nonborrowed reserves held at the Fed by depository institutions (primarily commercial banks) and currency in circulation. Normally, I include total reserves in my measure of thin-air credit, but because of the surge in borrowed reserves in the wake of recent bank failures, I have chosen to exclude borrowed reserves. The bulk of the increase in borrowed reserves is likely to be a temporary phenomenon and have had a de minimis effect on nominal aggregate spending on goods, services and assets. To be sure, if the Fed had not provided these borrowed reserves, nominal aggregate spending would have been adversely affected. After growing at double-digit rates in 2021, this narrower definition of thin-air credit grew at just 0.34% in the 12 months ended May 2023. The red line in Chart 2 represents the 12-month annualized percent changes in commercial bank loans and leases. After peaking at almost 12% year-over-year growth in November 2022, growth in loans and leases has slowed to about 7-3/4% in May 2023. With banks tightening their lending terms in recent months, I would expect a further deceleration in the growth of bank loans and leases.

In sum, the Fed has succeeded in breaking the back of consumer price inflation. Based on the relatively long lags (approximately 2 years) between percent changes in thin-air credit and changes in the CPI inflation rate, I would expect the CPI inflation rate to continue to trend lower. Therefore, it is my belief that the expected Fed decision to “pause” its federal funds rate increases on June 14, 2023 (Flag Day and former President Trump’s 77th birthday) will persist until Q4:2023, at which time the Fed will start cutting the federal funds rate in reaction to the ongoing recession.