ANALYSIS: From Energy to Beef: New CPI Report Points to Renewed Price Pressures

A woman shops at a grocery store in Columbia, Md., on May 17, 2023. (Madalina Vasiliu/The Epoch Times)

Since hitting a 41-year-high of 9.1 percent in June 2022, the U.S. annual inflation growth rate has been on a downward trend for 12 consecutive months. In June, the consumer price index slowed to a lower-than-expected 3 percent, the lowest level since March 2021.

“Good jobs and lower costs: That’s Bidenomics in action. Today’s report brings new and encouraging evidence that inflation is falling while our economy remains strong,” President Joe Biden said in a White House statement. “Annual inflation has fallen each of the last twelve months and is now down to 3%.”

Is it time to declare victory on the inflation front, or is it essential to wait a little longer?

“The inflation fight is not over,” says Raymond Micaletti, the CIO at Allio Finance, adding that it is unlikely the CPI will return to the U.S. central bank’s 2 percent target this year.

“The Fed itself is forecasting it not to reach that level until 2025,” Mr. Micaletti told The Epoch Times. “If it does reach 2 percent, however, it is unlikely to stay there for long given the aforementioned forces in play.”

Inflation Base Effect

Many economists are pointing to the base effect in the latest headline CPI figure.

In economics, the base effect can distort the current rate due to significantly high levels of inflation in the previous reference period. Experts note that this can make it challenging to determine inflation over time accurately.

So, with the annual CPI above 9 percent in June 2022 and now at 3 percent in June 2023, it would appear that price growth has decelerated at a rapid pace. However, this might not accurately depict the true inflation trajectory. The solution, some economists argue, is to employ more extended periods for comparison or alter the base value to a more representative level.

As a result, annual headline inflation rates in the coming months will be calculated against an elevated baseline. The same would apply to other goods and services, be it food or energy. The base effects could then subside heading into 2024, experts note.

According to the Federal Reserve Bank of Cleveland’s Inflation Nowcasting model, the CPI and core CPI, which eliminates the volatile energy and food components, could experience modest upticks to year-over-year prints of 3.4 percent and 5 percent, respectively.

Renewed Energy Price Pressures

Energy prices have decreased considerably compared to a year ago, with the index tumbling nearly 17 percent year-over-year. However, the energy category rose by 0.6 percent from May to June. In addition, on a month-over-month basis, gasoline prices jumped 1 percent, and electricity costs climbed 0.9 percent.

Within the global energy markets, West Texas Intermediate (WTI) futures have surged 10 percent over the last month, firming above $75 a barrel on the New York Mercantile Exchange. Year-to-date, the national average price for a gallon of gasoline has risen 10 percent to $3.54, according to the American Automobile Association (AAA).

“The rebound in oil prices hints that the risk of an uptick in headline inflation is building stronger for the coming months,” stated Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, in a note.

Oil prices are on an upward trajectory amid multiple bullish developments: global demand forecasts revised higher, an international supply deficit, flat domestic production, and declining U.S. crude inventories.

The Energy Information Administration (EIA) said in its recent Short-Term Energy Outlook (STEO) that proven oil and gas reserves are tumbling.

“International proved crude oil and natural gas reserves held by 187 publicly traded global exploration and production (E&P) companies declined by 5.6 billion barrels of oil equivalent (BOE) in 2022, or 2%, according to data from the companies’ annual financial reports,” the EIA stated.

Phill Flynn, an energy strategist at the PRICE Futures Group, believes oil prices still have more room for gains.

“Fundamentally, things are looking very bullish across the board for products and oil even a bearish American Petroleum Institute report yesterday didn’t seem to shake the market because they realize that if you look at the four-week moving average, this is just a blip in a tightening market,” Mr. Flynn wrote in a note.

The American Petroleum Institute reported that crude stockpiles increased by 3.026 million barrels for the week ending July 7, snapping a three-week slump. In addition, the weekly EIA storage report noted a supply build of nearly six million barrels after a cumulative withdrawal of approximately 16 million barrels in the previous three weeks.

Overall, the EIA forecasts that crude oil prices will reach roughly $80 per barrel by the year’s end and average at approximately $84 a barrel in 2024.

Beef Prices Trending Higher

The beef and veal subindex slowed to an annualized rate of 2.7 percent in June. But this component of the CPI report has gradually risen for several months in a row, including a 0.4 percent jump last month. Within this category, uncooked ground beef surged 1.6 percent on a month-over-month basis in June, slightly down from the 1 percent increase in May.

Over the last year, industry observers have warned that prices could begin climbing again, caused by producers exhausting their inventories and selling off livestock amid higher input costs (energy, feed, and labor) and drought conditions.

According to the U.S. Department of Agriculture (USDA), beef production is poised to decline by 8 percent, or more than 2 billion pounds, next year, the largest annual drop since 1979.

As consumer demand firms, market analysts anticipate North American cattle prices touching “new record territories,” says Angus Gidley-Baird, Senior Analyst – Animal Protein at Rabobank.

“This is driven by declining production volumes and firm demand. It stands in contrast to other beef producing and exporting countries, which have declining or steady cattle prices,” wrote Mr. Gidley-Baird in a research note. “The spread between US cattle prices and those in other countries is the largest in the history of Rabobank’s index. We expect it will start to impact trade flows, with a redistribution away from the more expensive US product to cheaper Australian and Brazilian product.”

Housing Inflation

Although rent inflation has eased for the third consecutive month to 7.8 percent, shelter costs are still the highest since the 1970s and 1980s.

In June, the shelter index contributed the most to the CPI report, the Bureau of Labor Statistics (BLS) said.

“The index for shelter was the largest contributor to the monthly all items increase, accounting for over 70 percent of the increase,” the BLS reported.

Moreover, economists contend that shelter is a lagging indicator by about 12 months.

“The prices of new rental leases have been falling for more than 12 months, but those declines are not yet fully reflected in the rental price index in the CPI-U,” wrote Christian E. Weller, a senior fellow at the Center for American Progress.

This means that it could take another year for cooling housing inflation to make a dent in the headline CPI.

That said, since the U.S. housing market lacks supply—the National Association of Realtors (NAR) estimates that the real estate market is short more than 300,000 affordable residential properties for middle-income buyers—this could leave prices higher and push more households to compete for rentals.

“Ongoing high housing costs and the scarcity of available homes continues to present budget challenges for many prospective buyers, and it’s likely keeping some buyers in the rental market or on the sidelines and delaying their purchase until conditions improve,” said Realtor.com Chief Economist Danielle Hale in a June report.

The national median rent is $1,995, down from 1.38 percent at the August 2022 peak of $2,053.