August 12, 2024
(The Consumer Price Index (CPI) is scheduled for release by the Bureau of Labor Statistics on Wednesday, August 14 at 8:30 AM Eastern Time.)
The overall CPI fell in June, after being flat the prior month. The core index rose by just 0.1 percent after rising 0.2 percent in May. This put the year-over-year inflation rate at 3.0 percent in the overall CPI and 3.3 percent in the core index.
The gap between the core and overall inflation rate for June was explained by a 2.0 percent drop in the energy index, which was primarily attributable to a 3.8 percent drop in gas prices. While gas prices continued to trend lower in July, it is unlikely the drop will be as large as it was in June.
However, we may see a somewhat better picture with food prices. The food index increased by 0.2 percent driven by a 0.4 percent increase in restaurant prices. The index for store-bought food rose just 0.1 percent, after being flat in May and falling by 0.2 percent in April. Inflation in grocery stores is well under control, with the index rising 1.1 percent over the last year and at just a 0.6 percent rate in the last six months.
However, restaurant prices have continued to rise more rapidly. This could be changing. There have been numerous reports in the media of McDonalds, Starbucks, and other chains feeling pressure to lower prices to bring back customers. We have not seen much evidence of price rollbacks in prior months, but perhaps it will show up in the July report.
Rental Inflation Will Continue to Moderate
The rent proper index and owners’ equivalent rent (OER) index both showed 0.3 percent increases in June, bringing their year-over-year rates to 5.1 percent and 5.4 percent, respectively. As noted before, the high inflation shown in these indexes is the reason that the CPI remains above the Fed’s 2.0 percent target. The CPI excluding shelter increased just 1.8 percent over the last year.
Last month, BLS released the New Tenant Rent Index data for the second quarter. It shows a year-over-year decline of 1.1 percent. This index, which measures rents in units that change hands, leads the overall CPI rental index, although the length of the lag is not clear. In any case, we can be certain that the direction of rental inflation is lower.
The rates to the next decimal for the rent proper and OER index were 0.26 percent and 0.28 percent, respectively last month. It is likely that both will round to just 0.2 percent for July. This will push the year-over-year rate in the rent proper index to under 5.0 percent and the OER index to just above 5.0 percent.
Inflation in Medical Care Services Should Remain Moderate
The index for medical care services rose just 0.2 percent in June. The course of inflation in this component is important since it comprises 6.5 percent of the overall index and 8.2 percent of the core index. It has risen 3.3 percent in the last year, driven primarily by a 6.9 percent increase in the index for hospital services.
As wage growth has slowed, pressure for price increases in this component should be lessening. The hospital index rose just 0.1 percent in June. If inflation in this component remains tame it should help alleviate any fears of rebounding inflation.
Moderate Inflation in Transportation Services
The index for transportation services showed an extraordinary 0.5 percent drop in June, driven by a 5.0 percent decline in the index for airline fares. That will not be repeated in July and will likely be partly reversed. However, we are seeing clear downward trends in other components of the index.
The index for motor vehicle maintenance and repair rose just 0.2 percent in June after rising 0.3 percent in May and being flat in April. It had been rising at double digit rates from late 2022 and most of 2023. With parts now more readily available and wage growth moderating, inflation in this component should be at close to a 2.0 percent rate going forward.
The auto insurance component rose 0.9 percent in June after falling 0.1 percent in May. This moderation is huge, given that year-over-year inflation had been over 20 percent earlier this year. It contributed 0.51 percentage points to the overall inflation rate over the last year and 0.64 percentage points to the core index. Any sustained slowing in this measure will have a large impact on inflation going forward.
Vehicle Prices Will Continue to Fall
The price of new and used vehicles fell by 0.2 percent and 0.5 percent, respectively, in June. New vehicle prices are now down 0.9 percent over the year, while used vehicle prices are down by 10.1 percent. Both still have considerable room to fall to reverse the pandemic run-ups. We should see further declines in both measures although the timing, especially for used vehicles, is erratic.
Supply Chain Goods Could See Further Price Hikes
After seeing falling prices through the last quarter of 2023 and first quarter of this year, the prices of items like appliances and TVs rose in June. The issue here is higher shipping costs, largely due to the Houthi attacks on shipping through the Red Sea. Shipping indexes have risen sharply, although are still less than half the peaks hit during the supply chain crisis. These costs are being passed on in higher prices for many goods.
Prescription Drug Index Likely to Show Low Inflation
Prescription drug prices were flat in June after jumping 2.1 percent in May. It seemed clear at the time that the May jump was an anomaly, and the June data support that assessment. The index is up 2.4 percent over the last year. We are likely to see inflation in the 2.0 percent range in this component going forward.
Inflation Continues to Slow Towards Fed’s 2.0 Percent Target
With rental inflation continuing on its downward path, there seems little reason not to think that inflation will move down towards the Fed’s target through the rest of 2024. The CPI inflation rate is likely to be 0.2 percent in both the overall and core index in July. After the weak jobs report for July, this should make the Fed more comfortable with a rate cut in September, since the PCE deflator is virtually certain to show the same pattern.
The biggest near-term concern is the impact of shipping costs due to the Houthi attacks in the Red Sea. This is an important economic dimension to a war that has led to enormous human suffering.
CEPR produces same-day analyses of government data on employment, GDP, and other topics. Follow @DeanBaker13 on X to get his quick-take analysis of government data immediately upon release.
