September 09, 2024
The overall and core CPI both rose 0.2 percent in July. The overall index is likely to show a lower rate, possibly rounding down to 0, in August as a large drop in gas prices will pull the index lower. Inflation in food prices should again be close to zero.
The core index is likely to again be 0.2 percent. The rate in July was held down by an unusually large fall in used car prices and a drop in the price of medical care services. While used car prices are likely to continue falling, the 0.3 percent decline in the index for medical care services was an anomaly that is not likely to be repeated.
Food Prices Will Remain Stable
After rising rapidly in 2021 and 2022, food price inflation slowed last year and has virtually disappeared in 2023. Since January, food prices have risen just 0.7 percent. This reflects the fact that the supply chain problems that pushed prices up earlier in the pandemic recovery are now behind us. Also, it seems that suppliers in the industry are now feeling increased competitive pressure and therefore are lowering – or at least not raising – prices.
Prices for restaurant food continue to grow more rapidly than grocery prices, reflecting in part increasing labor costs in the industry. Here too it seems competitive pressures have slowed the pace of inflation. The food away from home index rose 0.2 percent in July and has risen at a 3.4 percent annual rate over the last six months. If reports from several chains are to be believed, we will see continued slowing of inflation in this component through the rest of the year.
Rental Inflation Will Continue to Slow
The rent proper and the owners’ equivalent rent indexes rose 0.5 percent and 0.4 percent, respectively, in July. Over the last year they are up, respectively 5.1 percent and 5.3 percent. We know that the rental inflation will continue to fall because the BLS New Tenant Rent index, which measures the rent in units that change hands, shows an actual year over year decline. The CPI rental indexes will follow the New Tenant Rent Index as more leases turn over.
The one-month increases in rent reported for July were somewhat of an anomaly since they were higher than the 0.3 percent rate reported in both indexes for June. It is virtually certain we will see lower rental inflation in August, with both indexes likely to come in at 0.3 percent.
Inflation in Medical Care Services Will Likely Jump
There was an anomalous drop of 1.1 percent in the hospital services index in July. This index had been rising at an annual rate of more than 6.0 percent, so the July drop was presumably due to some erratic price reporting. It is virtually certain that it will rise again in August. With the index for professional medical services – the other major component of the medical services index – rising at more than a 2.0 percent annual rate, we should expect to see the medical services index rising 0.4-0.5 percent in August.
Vehicle Prices Will Continue to Fall
Both new and used car prices still have substantial room to fall to offset their pandemic run-ups. They have risen by 19.1 percent and 24.3 percent, respectively, from their pre-pandemic level. Before the pandemic the new vehicle index was rising at a rate of less than 1.0 percent annually, and the used vehicle index was falling at roughly a 1.0 percent annual rate.
Since wages rose by considerably more than their pre-pandemic pace in 2021 and 2022, these indexes cannot be expected to return exactly to their pre-pandemic pace, but they do have further room to drop this year and into 2025.
Prices of Other Supply Chain Items Should Also Fall
The prices of many of the items that saw sharp price increases in the pandemic are continuing to drop. Furniture prices fell 1.0 percent in July, laundry equipment and apparel prices both fell 0.4 percent. The prices of these and other items affected by supply chain problems should continue to drop in August.
Prices of Transportation Services Will Show Modest Increases
The index for motor vehicle maintenance and repair, which is just less than one-fifth of the transportation services index, fell 0.3 percent in July, its first decline in more than two years. This index had been rising rapidly through most of 2022 and 2023, driven both by higher prices for auto parts and also rising labor costs. Now that supply chain issues have been largely resolved, and the labor market has weakened, we should see less inflation in this index, but the July decline is not likely to be repeated.
There was also a sharp 1.6 percent drop in airfares in July, which will likely not be repeated. While the general direction for airfares may be downward, the monthly data are erratic and a sharp decline is likely to be followed by at least a small increase.
The auto insurance index is probably the biggest random factor in the CPI these days. This index rose 1.2 percent in July, adding 0.04 percentage points to the inflation reported for the month. Over the last year the index has risen 18.6 percent, adding 0.49 percentage points to year-over-year inflation.
Another Good Inflation Report
The August CPI report should show more progress in getting the inflation rate back down to the Fed’s 2.0 percent target. The biggest factors will be the two rental indexes, which together comprise more than one-third of the weight in the CPI. In this case, we know the general direction of inflation, we just don’t know the pace at which the inflation in the indexes will slow. It is worth noting that year-over-year inflation in the CPI is also below 2.0 percent, excluding the rental indexes.
This will be the last major economic release before the Fed’s September meeting on interest rates. Barring some extraordinary surprises, there should be nothing in this report that would deter the Fed from making a rate cut, and quite possibly a large one.
