Transport Holds The Key To A Lower CPI

By Simon White, Bloomberg markets live commentator and reporter

The transport component of US CPI is the largest contribution to the headline number. The fall in oil prices and decline in car dealers’ margins will soon take pressure off the transport CPI, which would allow the headline and core CPI to ease faster than the market is anticipating.

It’s CPI day again, with June headline expectations for 8.8% y/y versus 8.6% in May, and 5.7% y/y in core versus 6% in May. The transport component, accounting for almost a fifth of the headline number, will be key to watch, providing almost half of the annual growth in prices.

Much focus is often accorded to the shelter component of CPI as it’s the single-biggest contributor, at almost a third of headline. But shelter is relatively stable over time. Since 2021, though, transport has provided the biggest uplift to headline CPI and been the largest source of volatility. While shelter’s contribution has risen, it is only providing half as much uplift as transport.

But there are promising signs transport should soon ease. The transport category contains gas prices, but it is indirectly affected by rising energy prices through transportation services. This is why there is a strong relationship between transport CPI and oil prices. Using a simple model, the recent fall in oil prices implies transport CPI should be half its current value, which would translate into a 1.9% points fall in the headline figure.

However, one of the biggest boosts to transport inflation came from vehicle price rises. We all know prices rose due to chip-driven supply shortages and a surge in post-pandemic demand. But the specific mechanism was car dealers taking advantage of the situation to increase their gross margins.

We can see this in the PPI data, which for the trade sector measures margins, not the price of final demand. The chart below shows the boost to car dealers’ margins in the pandemic. Further, it shows this lift is fading, which should soon feed through to lower core inflation through a lower transport CPI.