October 08, 2024
The overall CPI rose just 0.2 percent in August, while the core index rose 0.3 percent. The overall index was held down by 0.8 percent drop in energy prices and just a 0.1 percent increase in food prices.
Gas prices continued to fall through September. With food prices likely remaining steady in the month, we should again see inflation in the overall CPI coming in below the core rate, likely by 0.2 percentage points, or close to 0.1 percent with a rise of 0.3 percent in the core. That would bring the year over year rate to 2.2 percent in the overall index and 3.1 percent in the core.
Food Prices Remaining Stable
Food prices have been remarkably stable over the last year and a half, rising just 1.2 percent since January of 2023. The monthly data are always somewhat erratic and there have been some recent increases in wholesale markets for some items like beef and milk, but it is unlikely to change the picture.
Also, retailers may be feeling more reluctant to raise prices for political reasons – especially with the two largest chains seeking a merger right now. Profit margins are still well above pre-pandemic levels, so there is room for the supermarkets to absorb some cost increases.
Restaurant Food Likely to Show Modest Price Rises
The index for restaurant food rose 0.3 percent in August. This index has substantially outpaced the index for store-bought food, rising 4.0 percent over the last year. Part of this story is rising labor costs. Restaurant workers are among the lowest paid workers in the economy, and they have seen some of the biggest pay increases of any workers. At the same time, profits at major chains like McDonalds and Starbucks have soared since the pandemic, indicating that they have raised prices by far more than labor costs.
There have been numerous accounts in the media about resistance to high prices forcing these chains to moderate price increases or even offer discounts. This should mean somewhat lower inflation in restaurant prices in the year ahead.
Further Slowing in Rental Inflation
The rent indexes are in a process of slowing from their extraordinary levels in 2022 back to an inflation pace that is likely to be somewhat lower than the pre-pandemic rate. The issue is the CPI indexes are driven largely by leases that were negotiated in the past and do not reflect the current rent for units on the market. BLS’s index for units that change hands actually shows a modest drop in rents over the last year.
The monthly rate of rental inflation peaked at almost 0.8 percent in December of 2022 in the rent property index and just over 0.7 percent in the owners’ equivalent rent (OER) index in the same month. Inflation in the indexes has edged down over the next 20 months, but is still well above the pre-pandemic pace – and even more so the index for marketed units.
The two indexes showed monthly inflation in August of 0.4 and 0.5 percent in the rent proper and OER index, respectively. This is likely somewhat inflated as a result of an unusually low reading for the two indexes in June (0.3 percent in both). With the adjustment from this anomaly likely over, the indexes will almost certainly show substantially lower inflation in September, possibly rounding to 0.3 in the rent proper index and 0.4 percent in the OER index.
New and Used Vehicle Prices Continue to Fall
The prices for both new and used vehicles have been reversing their pandemic run-ups over the last year, but they still have far to go, especially in the case of used vehicles. New vehicle prices were flat in August but are down 1.2 percent over the last year. Used vehicle prices fell 1.0 percent and are down 10.4 percent over the last year. We are likely to see a modest drop in new car prices in September. The used vehicle index is more erratic, and we most likely will see another decline, but quirks in timing make this harder to predict.
Medical Care Services Likely to Show Modest Inflation
The medical care services index fell 0.1 percent in August. This was almost certainly an anomaly; the index has risen 3.2 percent over the last year. There is little reason to believe that medical care inflation has slowed substantially from this pace. We are likely to see a rise of 0.3 percent in September. This will be an important factor pushing inflation higher, since this index has a weight of 6.5 percent in the overall index and 8.2 percent in the core index.
Auto Insurance Is Again a Huge Wild Card
The index for auto insurance prices rose 0.6 percent in August. While that is high, it is much lower than what we have been seeing, since the index is up 16.5 percent over the last year. The auto insurance index accounts for almost 3.0 percent of the overall CPI and more than 3.7 percent of the core index.
It is hard to overstate its importance in the CPI inflation measure. The index added 0.44 percentage points to the overall inflation rate in the last year. The rise in insurance rates is driven largely by higher claims due to increased accident rates, more expensive cars and repairs, and more climate-related damage, like flooding. The timing also depends on state regulatory changes.
Prices of Supply Chain Items Still Falling
We have not fully reversed the 2021-22 run-up in prices in a wide range of items like furniture, appliances, and car parts. The prices of most of these items fell in August and are down substantially over the last year. For example, the furniture index fell by 1.0 percent in August and is down 5.0 percent over the last year. We will likely see further price declines in September.
Overall Picture: Inflation Continues to Slow
The September CPI – the last release before the election – is likely to give a very good outlook on inflation. The inflation rate is getting very close to the Fed’s 2.0 percent target, with the main factor limiting progress being the rental indexes, which lag the indexes for marketed units. With hourly wages rising at close to a 4.0 percent annual rate, this means that real wages are rising at a very healthy pace.
