Preview: What to Look for in the December CPI

January 08, 2024

The inflation rate has slowed sharply in recent months, with the overall CPI rising just 0.1 percent in November after being flat in October. It has risen at just a 2.2 percent annual rate over the last three months, down from a 3.1 percent rate over the last year.

The core rate has risen somewhat faster, going up 0.3 percent in November and 0.2 percent in October. It rose at a 3.4 percent annual rate over the last three months, down from a 4.0 percent rate over the last year.

The factors that held down the overall CPI relative to the core should again be seen in the December data. Gas prices fell by 6.0 percent in November, knocking 0.2 percentage points off the November CPI. We should see a comparable decline in gas prices reported for December. Store-bought food rose by just 0.1 percent last month, helping to keep the overall CPI below the 0.3 percent core rate. Inflation in store-bought food is likely to again be moderate in December.

Rental Inflation Continues to Slow

The two rental indexes, rent proper and owners equivalent rent, make up a huge chunk of the CPI (33.5 percent of the overall CPI and 42.1 percent of the core index). The sharp rise in rent during the pandemic has been a major factor propelling inflation. Over the last year, the two indexes rose 6.9 percent and 6.7 percent, respectively. They added 0.5 and 1.7 percentage points to the inflation rate over the last year.

The rate of rental inflation in marketed units that turn over has slowed sharply, but this slowing will appear in the CPI indexes only gradually. While private indexes of marketed units have shown that rents have largely stabilized or are even declining, the CPI indexes both showed increases of 0.5 percent in November.

This pace of increase is likely to edge down in December, with the indexes likely showing gains of just 0.4 percent. Inflation in these indexes will slow further over the course of 2024, likely getting to an annual rate of 2.0 percent, and possibly even lower.

New and Used Vehicle Prices Are Headed Downward

New and used vehicles were also major contributors to inflation in 2021-2022. After rising rapidly in 2021 and 2022, new vehicle prices seem to have peaked in September. Used vehicle prices peaked early in 2022 and have generally been headed downward in the last year and a half.

There is considerable room for both indexes to fall. The new vehicle index is 20.8 percent above its pre-pandemic level, while the used vehicle index is 37.4 percent higher. Both indexes had been trending downward before the pandemic.

The pace of decline will be erratic but the general direction for both indexes will be downward. New vehicle prices fell 0.1 percent in November for the second consecutive month, but are still 1.3 percent above their year-ago level. Used vehicle prices rose 1.6 percent in December, but are down by 3.8 percent over the last year. It is likely that both indexes will show declines in December, but they can be erratic movements, especially in the used vehicle index.

Other Supply Chain Goods

Most other goods, which also saw substantial increases in price during the pandemic, are seeing falling prices now. The index for household furniture fell 1.1 percent in November and is down 3.1 percent over the last year. The index for appliances fell 1.0 percent in November and is down 3.5 percent over the last year. Apparel prices are up 1.1 percent over the last year, but fell 1.3 percent in November. The general direction of prices for all of these items will be downward, although the exact pace is difficult to gauge.

Non-Housing Services

This area is a mix of items from auto insurance and car repair to medical services and restaurant meals. Inflation in most of these areas has been reasonably well contained, but there are some exceptions. Most notable among the exceptions is car insurance. It has been rising at double-digit rates for most of the last two years. It rose by 1.0 percent in November and is up by 19.2 percent over the last year.

This is a big deal for the CPI measure of inflation since the auto insurance component accounts for 2.8 percent of the overall CPI and 3.5 percent of the core index. It added just under 0.5 percentage points to inflation over the last year. Inflation in this component has been slowing recently, and it is likely that it will continue to slow over 2024.

Inflation in medical care services has been remarkably well-contained, actually declining by 0.9 percent over the last year. Much of this is due to the peculiar way in which the CPI measures inflation in health care insurance, with this index showing a decline of 30.3 percent over the last year. However, other medical care components have also shown limited inflation. The index for professional medical services has risen just 1.1 percent over the year, although it has been rising more rapidly in recent months.

Overall Picture – Continuing Disinflation

The inflation rate slowed rapidly over the course of 2023, and we should expect to see this pattern continue into 2024. The slowing of inflation in the rental indexes is a virtual certainty given the patterns in indexes of rents in marketed units. The reversal of the price rises in goods affected by supply chain issues is also a virtual certainty.

The one potential problem area is services where prices could be driven higher by large wage increases. However, wage growth has also slowed sharply over the course of the year, so there is little reason to believe that the current pace of wage growth will lead to major inflationary pressures.

Furthermore, since there was a large shift from wages to profits at the start of the pandemic, it is reasonable to expect that somewhat faster wage growth can be absorbed by shrinking profit margins. Also, the recent spurt in productivity growth should help to alleviate inflationary pressures.

One potential problem on the horizon is the conflict in the Middle East. The blocking of shipping lanes has already led to a jump in shipping costs. If this blockade persists, it will be passed on in higher prices, although it is unlikely it will be anything like what we saw during the pandemic.

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