November 12, 2024
The overall CPI rose 0.2 percent in September, bringing its year-over-year increase to 2.4 percent. The core index rose 0.3 percent, which brought its year-over-year rise to 3.3 percent. We are likely to see a further decline in monthly inflation in both indexes.
The overall index was below the core last month due to a 1.9 percent decline in the energy index. We are likely to see a comparable drop in October.
Food prices rose 0.4 percent in September, with store bought food prices rising 0.4 percent, compared to 0.3 percent for restaurant prices. The biggest factors in food prices were sharp jumps in meat and fruit and vegetable prices. Wholesale meat prices have soared, so we may see a further rise this month; but the overall increase in food prices is still likely to be somewhat less than in September.
On net, we should still look for the overall CPI to again be 0.1-0.2 percentage points lower than the core inflation rate.
Rental Inflation Slows Further
Both rental indexes rose 0.3 percent in September. This brought the year-over-year rate of inflation for the rent proper index to 4.8 percent and 5.2 percent for the owners’ equivalent rent index. Both indexes peaked at over 8.0 percent at the start of 2023 and have been falling sharply since then.
They are virtually certain to fall further. The indexes showing rents for units that changed hands continue to show rental inflation of less than 2.0 percent. This means that we can have considerable confidence that rental inflation in the CPI will slow further through the rest of this year and into the next.
It is also worth noting that the vacancy rate on rental units has risen sharply, hitting 6.9 percent in the third quarter. This is up from a low of 5.6 percent in the fourth quarter of 2021 and above the 6.4 percent rate in the fourth quarter of 2019. This provides further grounds for confidence that rental inflation will slow.
Medical Services Index Likely to Show Moderate Inflation
The medical services index jumped 0.7 percent in September. This index has been erratic; it fell in the prior two months, but it is outpacing the rest of the CPI. It has risen by 3.6 percent over the last year. Most of this increase is due to the hospital and related services index, which has risen by 4.8 percent over the last year, as compared to 2.3 percent for the professional services index. The more rapid increase in the hospital price index could reflect increased concentration in the sector and the greater role of private equity. The rise in the medical services index will almost certainly be slower in October, largely as a bounce back from the September reading.
Transportation Services Index Also Likely to Show Slower Growth
The index for transportation services jumped 1.4 percent in September, driven by a 3.2 percent increase in airfares, a 1.2 percent rise in the car insurance index, and a 1.0 percent increase in the maintenance and repair index. The index for airfares is highly erratic. It rose by an even sharper 3.9 percent in August, but it is up by just 1.6 percent over the last year. Given these recent jumps, it is likely that it will show little change – or even decline – in October.
Car insurance accounts for nearly 3.0 percent of the overall CPI. The index has increased by 16.0 percent over the last year. It accounts for 0.44 percentage points of the rise in the CPI over the last year. This is being driven largely by increased claims due to weather-related factors and higher repair costs.
The September jump in the maintenance and repair index is somewhat of an anomaly. It had been rising rapidly in 2022 and 2023, but increases had slowed this year, with the index up 4.9 percent year-over-year. We are likely to see a much smaller increase in the index in October.
Vehicle Prices Should Show Small Declines
New vehicle prices rose 0.2 percent in September, while used vehicle prices rose 0.3 percent. Both increases were departures from a downward path, with the indexes down 1.3 percent and 5.1 percent, respectively, over the last year.
There is room for both indexes to fall further. The new vehicle index is 19.3 percent above its pre-pandemic level, while the used vehicle index is 23.5 percent higher. Prior to the pandemic, the new vehicle index was roughly stable and used vehicle index was falling at a rate close to 1.0 percent annually. The jump in wage growth following the pandemic will push these indexes higher, but it is reasonable to expect further drops over the next year.
Other Supply Chain Items Likely to Show Price Declines in October
The index for household furnishings and supplies was flat in September, while the index for apparel jumped by 1.1 percent. The household furnishings and supplies index had been trending downward. It’s down by 2.2 percent over the last year. It is likely to continue its decline in October.
The apparel index is highly erratic on a monthly basis; large jumps or declines are usually reversed in subsequent months. It has been rising at a 1.8 percent pace over the last year. This category will be especially hard-hit by any tariffs put in place by the next administration since such a large share of these products are imported.
Inflation Remains Moderate and Close to the Fed’s 2.0 Percent Target
This should be a relatively boring CPI report. The downward trend in rents will be the biggest factor driving CPI inflation lower, but we should also see reversals of September anomalies in the index for airfares, medical services, and apparel.
Inflation in most other areas is reverting back to pre-pandemic rates or even lower. The index for education and communication services has risen just 2.3 percent over the last year. The index for recreation services has risen 2.2 percent.
There are few areas where inflation appears to be a problem at present. The October report should continue the good news. However, we may see a very different picture if the next administration carries through with plans for high tariffs and mass deportations. But at this point, inflation is not a problem.
