Truflation: US BLS Inflation Prediction February 2023

Last month’s higher-than-expected US Consumer Price Index (CPI) prompted the Fed to adjust its rate hike plans. In a recent Senate meeting, Fed Chair Jerome Powell announced a potential 0.5% rate increase at the next meeting, instead of the 0.25% expected by analysts.

However, the unfolding situation with collapsed institutions Silicon Valley Bank (SVB), Signature Bank, and Silvergate Bank - which has prompted the US government to step in to guarantee deposits at SVB and Signature - may tip the scales bank in favor of 25bps.

Indeed, tomorrow’s inflation release from the Bureau of Labor Statistics (BLS) is likely to be the most anticipated data event of the past two years given that financial stability - as well as inflation - is a key priority for the Fed.

Recent inflation trends

In January, US inflation remained high at 6.4%: lower than December's rate of 6.45%, but still well above the Federal Reserve’s (Fed) target of 2% and market expectations of around 6.2%. To curb inflation and cool down the economy, the Fed is increasing borrowing costs via higher interest rates, especially for businesses and home buyers. These actions have already impacted rate-sensitive sectors such as housing, leading to a slowdown in activity.

As such, Truflation expects a continued decline in the rate of inflation in February. We are forecasting that February's CPI number will stand at 6.1% year-on-year, and 0.6% month-on-month.

In January our prediction for a faster decline was not met due to the BLS official housing category. Our subsequent investigation leads us to believe our housing data is nine months ahead of the BLS. We have since adjusted our BLS CPI prediction to account for this lag. You can read more about our investigation into the BLS housing sector, and why we believe it is almost a year out of date, here.

Meanwhile, the live Truflation index, which is an independent, verifiable on-chain source of unbiased inflation data, is currently showing US inflation at 4.56% (as of March 14, 2023). Below we outline the deflationary and inflationary trends we are seeing in our data for February.

Utilities and alcohol decline in February

For February, the reduction in the rate of inflation on the Truflation index is driven by utilities, alcoholic beverages, public transportation, and healthcare.

• Utilities represent a significant contributor to the downward trend in inflation, with costs decreasing by 1% between January and February. across all subcategories. The most significant decrease comes from electricity, given it is a substantial portion of the category, followed by natural gas.
  
• Truflation has also observed a decline in alcoholic beverage prices, which are down 1.8% month-on-month. This is likely due to consumers shifting away from purchasing high-alcohol beverages during the festive season and returning to their usual consumption patterns or even giving up alcohol for “Dry January”.
  
• Meanwhile, healthcare fell 0.1% over the past month led by medical services and insurance, while public transportation also fell a surprising 3% over February potentially due to lower airfares. The clothing category also fell a marginal 0.1% driven by the footwear category.

Transportation prices remain stable

• Transportation costs have seen a gradual increase of 1.6% compared to a year ago, but this trend is largely due to vehicle purchases entering negative pricing territory compared to last year.
  
• Despite this, other vehicle expenses have continued to rise YoY, likely fueled by the higher number of auto loans. The total value of these loans has reached $1.5 trillion, with the average debt burden sitting at $14,469, according to the Federal Reserve Bank of New York.

Housing remains downward driver, despite Feb uptick

• The housing sector, which represents the most significant portion of household expenditures and prices, has exhibited a steady decline in recent months (according to Truflation data). However, towards the end of February / early March, Truflation has observed a slight uptick in this trend, driven by a 0.2% rise in the prices of owned dwellings, while rented dwellings are down by 0.8%.
  
• Average home prices have been declining since July 2022, according to US census department data. Additionally, Zillow reports that the percentage of listings that have undergone price reductions has risen to 22%. These developments, combined with the Fed's interest rate hikes, are contributing to a cooling effect on house prices.
  
• Considering the nine-month lag between Truflation housing data and the data used by the BLS, we predict BLS will start to report a decline in this category in line with our curve after March. The slight uptick we’re seeing now won't show in BLS data until November 2023.
  
  

Food: shoppers continue to feel the pinch

• Food prices continue to be the leading upward contributor to inflation, causing many families to look for ways to cut back on grocery expenses. Even as overall inflation cools, grocery prices have increased by 0.8% from December to January, driven by rising prices for food consumed at home.
  
• This is particularly challenging for consumers since the food category holds a significant weight in the inflation index. Prices for eggs and butter have surged by over 60% and 31% respectively compared to last year. As a result, more than 1 in 5 consumers have been shopping at dollar stores to save money on groceries.
  
• Factors driving the food price increase include supply chain disruptions due to the Ukraine war and climate change, as well as transportation costs.
  
• Consumers are exploring ways to cut down food waste by shopping more frequently for specific meals, buying items in bulk, and switching from name brands to store brands to save money.

About Truflation

Truflation provides a set of independent inflation indices drawing on 30+ different data partners/sources and more than 12 million product prices across the US. The indices are released daily, making it one of the most up-to-date and comprehensive inflation measurement tools in the world.

Truflation has been leveraging its measurement tool to predict the BLS CPI number. Over the past four months, Truflation has accurately predicted outcomes for two months, with a deviation of only 20 basis points for the third, which still remained the closest to the market's projection. Last month’s prediction missed the mark by 60 basis points due to misaligned housing data, which we expect to persist until the end of March.

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