Inflation report is a mixed bag – an economist explains why some items are rising faster than others

Economists worried about soaring inflation got some good news to start the year: The rate of inflation has eased. The first report card of 2023 on consumer prices^[1], released on Jan. 12, showed that the overall cost of goods and services decelerated to an annual pace of 6.5% in December, the slowest in over a year^[2] and down from 7.1% in November.

But there’s bad news too, especially if you are an egg-munching^[3] renter^[4] fond of frequent regular haircuts^[5]. In quite a few categories, the cost of living rose at an even faster pace.

That’s because price inflation isn’t uniform. Different products and services are affected by myriad factors. So while some prices may have fallen during December, slowing the annual rate of inflation, other items kept getting more expensive.

The Conversation asked Edouard Wemy – an economist from Clark University^[6] who never sets off to work without his morning breakfast of two eggs, sunny side up – to explain how different items in the consumer price basket fared in the latest inflation report.

Energy

When you look at the detail of the latest report on the consumer price index, you’ll see that overall energy costs declined. That’s because there was a steep decline in gasoline prices – down 9.4% in the month of December^[7] after dropping 2% in November.

While that’s good news, it’s a bit puzzling. AAA was expecting demand for gasoline to be very high^[8] over the month, which usually happens in winter. This typically pushes prices up. My best guess is either demand wasn’t as strong as expected due to fears of a coming recession or there has been an easing on the supply constraints that has contributed to pushing the price of gas up.

An exception to this downward energy price trend was in energy services – that is, electricity and piped gas – where prices actually ticked up. The reason is largely due to the rising cost of doing business. Utility companies and pipeline services are suffering as a result of higher labor costs and are passing on the added cost to consumers through higher prices. The latest jobs report^[9] shows average hourly earnings rose 4.6% in December from a year earlier.

Groceries

Overall food inflation slowed in December, with the cost of groceries rising just 0.2% in the month – down from 0.5% in November.

But there is a lot of variation in the cost of grocery items. While the price of fruits and vegetables fell in December, the cost of eggs jumped by 11.1%. That’s due to an outbreak of bird flu^[10] that could well last until into the summer.

In addition to that, farms are seeing the same wage pressures as other businesses, which are then passed on to consumers.

Housing

The cost of shelter, whether from renting or owning, rose 0.8% in December^[11] – the biggest one-month gain since the 1980s.

This is understandable given the numerous interest rate hikes^[12] during 2022. Rising interest rates means that taking out a home loan is more costly, which in turn pushes more people into renting. Added demand on rental properties in turn pushes the prices that landlords demand up.

When interest rates eventually drop, it should bring the overall cost of shelter down, as it would encourage more people to buy homes. But I’m not optimistic that rates will fall until 2024, so don’t expect any downward movement on shelter in the coming months.

Hospital visits

The cost of going to the hospital was another category that saw a big increase. Average prices for hospital and related services jumped 1.5% in December, the biggest gain since 2015^[13].

Again, this is due to the rising cost of doing business – that is, upward pressure on wages^[14] – coupled with still-high energy costs.

Used cars and trucks

Another category that helped the overall pace of inflation slow down is used cars and trucks.

After soaring throughout the initial phase of the COVID-19 pandemic, used car prices have been plunging in recent months. They fell 2.5% in December, putting the annual decline at 8.8%^[15]. The cost of new cars also dropped in December.

References

1. ^{^} first report card of 2023 on consumer prices (www.reuters.com)
2. ^{^} slowest in over a year (fred.stlouisfed.org)
3. ^{^} egg-munching (fred.stlouisfed.org)
4. ^{^} renter (fred.stlouisfed.org)
5. ^{^} regular haircuts (fred.stlouisfed.org)
6. ^{^} economist from Clark University (www2.clarku.edu)
7. ^{^} down 9.4% in the month of December (fred.stlouisfed.org)
8. ^{^} expecting demand for gasoline to be very high (newsroom.aaa.com)
9. ^{^} latest jobs report (www.bls.gov)
10. ^{^} outbreak of bird flu (www.reuters.com)
11. ^{^} rose 0.8% in December (fred.stlouisfed.org)
12. ^{^} numerous interest rate hikes (theconversation.com)
13. ^{^} biggest gain since 2015 (fred.stlouisfed.org)
14. ^{^} upward pressure on wages (www.bloomberg.com)
15. ^{^} putting the annual decline at 8.8% (fred.stlouisfed.org)