June 10, 2024
Both the overall and core CPI increased 0.3 percent in April, bringing their year-over-year rates to 3.4 percent and 3.6 percent, respectively. This continues the downward trend in inflation that we have been seeing for almost two years now.
In April, food prices were unchanged, while the energy index rose 1.1 percent. In May, it is likely the energy index will rise somewhat less, since gas prices began to fall near the end of the month. Food prices have been reasonably contained for the last year, which should continue into May. As a result, the overall CPI for May is likely to again be roughly the same as the core, with both being near 0.3 percent for the month.
Rental Inflation Will Continue its Downward Path
As has been frequently noted, the above target inflation (the Fed’s 2.0 percent inflation target) is almost entirely attributable to rent. The CPI excluding shelter increased just 2.2 percent over the last year. The impact of rent on the Personal Consumption Expenditure (PCE) deflator, which is the index the Fed targets, is somewhat less. But that index, excluding shelter, rose just 1.8 percent over the last year, instead of 2.7 percent overall.
Rental inflation is continuing to slow, following the big burst in the pandemic associated with the surge in people working from home. Indexes that measure the rate of inflation in units that change hands now show year-over-year inflation near zero, with some even showing falling rents. Inflation in the CPI rent indexes, which measure rental inflation in all units, will almost certainly continue to decline so as to come into line with the inflation rate in marketed units.
There is considerable uncertainty about the lags here, both because we don’t have the comparison indexes over long periods of time and also because the pandemic was a unique experience, where the past patterns may not be very informative. Nonetheless, we can be confident that in the not too distant future, we will be seeing rental inflation of 2.0 percent or less, as opposed to the 5.4 percent and 5.8 percent rates shown respectively by the rent proper and owners equivalent rent index over the last year.
New and Used Vehicles Continue their Downward Path
New vehicle prices fell 0.4 percent in April. They have been largely flat over the last year. With production having caught up with demand following supply chain problems in the pandemic, we are likely to see further price declines over the rest of the year.
There is a similar story with used vehicles, but there is more room for a reversal (the pandemic price increases were considerably larger), and we are further along on this path. Used vehicle prices fell 1.4 percent in April and are down 6.9 percent over the last year.
Store-Bought Food Prices Likely to Fall Again
The index for store-bought food fell by 0.2 percent in April, after being flat the prior two months. The index is up just 1.1 percent over the last year. Towards the end of the month, several major retailers announced that they would be lowering prices in an environment they say was increasingly competitive. It is not clear how much of these newly announced price reductions will show up in the May data, but we should expect that prices will at least be flat, if not declining modestly.
Inflation in restaurant prices typically ran about 1.0 percentage point higher than inflation in food before the pandemic. The gap has been larger recently, with restaurant prices rising 4.1 percent over the last year. However, inflation in restaurant prices has also been moderating, rising 0.3 percent in March and April, after rising just 0.1 percent in February. We will likely see this moderation continue with inflation of just 0.2–0.3 percent in May.
Inflation in Medical Care Services Likely to Remain Moderate
Before the pandemic, inflation in medical care services typically ran somewhat faster than the overall CPI. Year-over-year inflation in this category exceeded 5.0 percent in each of the five months before the pandemic hit. It slowed sharply during the pandemic, but in the last two years it has been highly erratic, with the reading driven largely by the health insurance component.
The indexes for professional medical services and hospital services rose 0.2 percent and 0.6 percent, respectively in April. The producer price indexes for these categories indicate that inflation in these categories is not accelerating. We should see inflation in the professional medical services index again close to 0.2 percent, while the hospital services index is likely to be considerably lower in May.
Automobile Insurance Inflation Should Slow
Inflation in auto insurance has been soaring, accounting for a large share of CPI inflation. Over the last year, the index has risen 22.6 percent, adding 0.58 percentage points to the overall inflation rate. A variety of factors have led to rising insurance prices including more accidents, higher repair costs, and more climate-related damage to vehicles. The impact of these factors should be lessening (e.g., accident rates have leveled off, if not declined some), but there is a lag between changes in costs and changes in premiums, so it may be some time yet before inflation in the index falls to a more reasonable pace.
Apparel Prices Likely to Fall
Apparel prices rose 1.2 percent in April, after rising 0.6 percent in February and 0.7 percent in March. These increases are striking since apparel prices previously had been flat or falling in 2023. It is likely that these rises are being driven by problems with seasonal adjustments, which means they are likely to be largely reversed in future months.
Inflation Continues to Moderate
The basic story in May should be that the downward trend of inflation is continuing. The biggest factor keeping inflation above the Fed’s target rate remains rental inflation, which is on a gradual downward path. We continue to see declining prices in the many areas where the pandemic supply chain problems sent inflation soaring. The biggest wild card continues to be services, such as health care, transportation services, and restaurants. These items always had somewhat higher inflation than the overall CPI, but the big question is whether inflation in these areas stays moderate or whether there is a serious upward trend that will pose problems even when rental inflation falls back to its pre-pandemic pace.
