Dissecting CPI, Ditching Hoagies

Episode Summary

Executive Summary: The episode dissects a very hot June CPI and concludes inflation is still broad, but much of the pressure comes from temporary supply shocks—energy, vehicles, food, and reopening effects—rather than entrenched demand. The hosts expect inflation to cool materially over the next year as goods disinflation and energy relief offset sticky rent inflation, though housing services remain the main persistent risk.

Main Topics: June CPI shock and inflation breadth (Priority: 5/5): The hosts frame June CPI as another ugly print, with inflation broadening beyond a few categories and pushing markets toward more aggressive Fed tightening. Energy prices and oil market dynamics (Priority: 5/5): Energy was the biggest contributor to headline inflation, but panelists argue prices have likely peaked and could flatten or fall as refinery supply improves and recession fears rise. Vehicle prices and supply-chain normalization (Priority: 4/5): Used and new vehicle prices were a surprise upside in June, but the team expects wholesale-to-retail pass-through and improving inventories to bring prices down over time. Food inflation and agricultural shocks (Priority: 4/5): Food prices are elevated due to energy-intensive production, war-related grain disruption, and weather/climate problems, but contributors expect the worst of the increase to pass. Housing services and sticky rent inflation (Priority: 5/5): Rent and owner-equivalent rent are accelerating and are likely to remain a persistent source of inflation well into 2023 because of long lags from house prices to rents. Fed outlook and recession risk (Priority: 4/5): The discussion links hot inflation to more hawkish Fed policy, with recession odds rising as tighter policy collides with weakening sentiment and broadening price pressures. Inflation expectations and consumer behavior (Priority: 3/5): The panel argues current inflation psychology differs from the 1970s: consumers are less likely to rush purchases simply because prices are rising, which may help slow demand-driven inflation.

Key Arguments: Headline CPI is being driven primarily by supply shocks—energy, supply chains, reopening—not by persistent demand overheating. Energy contributed 3.6 percentage points to June year-over-year CPI, so a flat or declining energy market would sharply reduce headline inflation. Supply-chain-constrained components added 1.1 percentage points to CPI, but their contribution has been easing as logistics and inventories improve. Vehicle prices should eventually soften because wholesale auction prices have already weakened and retail CPI typically lags auctions. Food inflation is likely near peak contribution because commodity and energy inputs are stabilizing, even though absolute food prices remain high. Rents are the most persistent inflation problem; housing services added about 2 percentage points to CPI and will likely stay elevated through next year. The Fed will stay aggressive if inflation remains broad, with markets already pricing in larger hikes after the CPI release. Inflation should moderate significantly by next year if energy stays flat or lower and supply-chain relief continues. A recession would likely accelerate disinflation, but the baseline assumes no recession and still sees CPI falling materially.

Data Points: June CPI year-over-year: 9.1% - Headline consumer prices in June, the highest since the early 1980s June CPI monthly change: More than 1% - Another very hot monthly inflation reading Energy contribution to June CPI y/y: 3.6 percentage points - Direct effect from gasoline, electricity, heating oil, and utilities Supply-chain-constrained contribution: 1.1 percentage points - New and used vehicles, audio/video equipment, children’s apparel, etc. Reopening contribution: 0.3 percentage points - Restaurants, hotels, airlines, and other reopening-sensitive services CPI excluding energy, reopening, and supply chains: 4.5% y/y - Underlying inflation after stripping temporary drivers May comparable figure excluding those factors: 3.7% y/y - Shows broadening price pressures in June Housing services contribution: 2 percentage points - Largest contribution since the early 1990s Vehicle share of CPI: About 8% - New and used vehicles are a meaningful component of the index Used vehicle auction data: Hundreds of thousands of transactions; about 80% coverage - Moody’s wholesale price index methodology CPI vehicle survey sample: About 480 retail observations - Used vehicle CPI is based on a much smaller retail sample U.S. vehicle production: 10.7 million SAAR in May; 10.5 million in April - Nearly back to 2019 average levels 2019 U.S. vehicle production average: 10.9 million SAAR - Pre-crunch benchmark U.S. vehicle production during prior six quarters: 9.2 million SAAR - Depressed production during supply-chain crunch Germany vehicle production vs 2019: Down a little less than 20% - Europe still constrained by war and supply issues Japan vehicle production vs 2019: Down about 35% - Hit hardest by China lockdown exposure U.S. vehicle sales rate in June: 13 million SAAR - Demand remains weak because supply is constrained U.S. miles driven: 3.75 trillion - Record-high May reading, showing demand for driving remains strong Food inflation outlook: Near zero or slightly negative y/y by June 2023 - Panel expects food price gains to flatten after recent surge Gasoline price decline: From about $5.00 to about $4.65 per gallon - Nationwide regular unleaded prices fell from the peak Refining capacity utilization: 94.5% - Refiners are operating near full capacity Prior refining utilization: 88% - Earlier in the year before the recent run-up Crack spread example: Diesel crack spread fell from over $100/barrel to around $50 - Signals easing pressure on refined product prices U.S. crude oil production: 12.0 million barrels per day - Week ending July 8, up from 11.8 million barrels per day at year-end Small business sentiment: -61 - NFIB-style pessimism statistic, interpreted as extremely weak expectations Inflation forecast for end-2022: About 6% - Panel consensus forecast for CPI by December 2022 Inflation forecast for end-2023: About 3% to 3.5% - Baseline forecast absent recession Fed target for CPI: 2.5% - Upper end of the target range referenced by the hosts Return to target timing: First half of 2024 - Most panelists expect CPI to reach target around then Recession odds: About 40% to 65% over 12 months - Different speaker estimates; concern has increased

Pivotal Quotes: "It was another ugly CPI print." — Ryan Sweet: Opening summary of the June inflation report "This was a bad report. This was terrible." — Chris Dorides: Reaction to the breadth and severity of the June CPI data "The cure for high prices is high prices." — Chris Lafakis: Explaining why higher energy prices are now pulling supply back into the market

Implications: Inflation likely eases over the next year, but not smoothly: energy and goods should cool, while rents keep core inflation sticky. The Fed stays on a hawkish path, and recession risk rises if supply relief stalls or energy shocks return.