July 09, 2024
(The Consumer Price Index (CPI) is scheduled for release by the Bureau of Labor Statistics on Thursday, July 11 at 8:30 AM Eastern Time.)
The overall CPI was flat in May, while the core index rose by 0.2 percent. This brought year-over-year inflation in the two indexes to 3.3 percent and 3.4 percent, respectively. The inflation rate is continuing its slow downward trend back towards the Fed’s 2.0 percent target. We should see more progress in June.
The cause of the gap in May between the core inflation rate and the overall rate was a 2.0 percent decline in energy prices in the month. Energy prices have been more stable in June, so it is not likely we will see a similar fall again.
On the other hand, the course of food prices in June will be worth noting. Several of the major retailers, as well as fast food chains, announced major price rollbacks at the end of May. It will be interesting to see the extent to which these announced price reductions show up in the CPI. Store-bought food prices have been stable the last four months (they have actually fallen by 0.2 percent since January), however, profit margins are still above pre-pandemic levels, so there is room for some further price declines.
There is likely to also be some slowing in restaurant food prices. They have far outpaced grocery prices over the last year with a 4.0 percent year-over-year increase compared to 1.0 percent for store-bought food. Restaurant prices rose 0.4 percent in May, the June increase should be considerably less.
Continue Slowing of Rental Inflation
Rent has been the main factor in elevating the inflation rate for the last two years. The CPI excluding shelter has risen at just a 2.1 percent rate over the last year. The monthly rate of inflation for both the rent proper index and the owners’ equivalent rent index for May was 0.4 percent (0.39 percent and 0.43 percent to take it to the next digit). This put rental inflation over the last year in the two indexes at 5.3 percent and 5.7 percent, respectively. That is down from respective peaks in the first half of 2023 of 8.8 percent and 8.1 percent.
As has been widely noted, the CPI measure reflects inflation in leases signed one or two years ago when the surge in people working from home led to a serious shortage of housing. Inflation on rental units currently on the market has fallen to near zero.
This means that the pace of rental inflation will continue to slow. Since the rental components account for 34.2 percent of the overall CPI and 43.0 percent of the core index, this slowing matters hugely for the CPI measures of inflation.
Inflation in Medical Services Should Remain Moderate
The Fed has been focusing on the course of inflation in non-housing services. Medical care services are close to a fourth of this category in the CPI. (They have a much larger weight in the Personal Consumption Expenditure (PCE) deflator since this includes payments made by private insurers and the government.)
Inflation in medical care services was 3.1 percent over the last year and 0.3 percent in May. Before the pandemic, medical care inflation typically outpaced overall inflation by roughly 1.0 percent annually. It had trailed inflation during the pandemic. An inflation rate in this category near 3.0 percent is not an overall inflation problem but it would mean that health care costs are posing an increasing strain on people’s budgets and the economy. The monthly number for May is likely to again be 0.3 percent.
New and Used Vehicle Prices Continue to Fall
New vehicle prices fell 0.5 percent in May and are now down 0.8 percent year-over-year. Used vehicle prices rose 0.6 percent but are down 9.3 percent year-over-year. Both items still have considerable room for price declines given their large run-ups in the supply chain crisis. Their weight in the overall CPI is 3.6 percent and 1.9 percent, respectively, and in the core, 4.5 percent and 2.4 percent, so further price declines will have a substantial impact on the CPI.
Further Declines in Other Supply Chain Items
There is room for further price declines in items like appliances, household furniture, and apparel. Appliance prices rose 0.6 percent in May but are down 4.9 percent year-over-year. The May increase was an anomaly that will likely be reversed in June. Furniture prices fell 0.6 percent in May and are down 3.7 percent year-over-year. Apparel prices were down 0.3 percent in May but have risen 0.8 percent year-over-year. Price declines on these items will dampen the overall rate of inflation through the second half of 2024.
Prescription Drug Price Inflation Will Slow Sharply
Prescription drug prices jumped 2.1 percent in May adding almost 0.02 percentage points to overall inflation in the month. The monthly price changes are erratic. They also rose 2.1 percent in January of 2023. Over the last year, prices are up 2.4 percent. It is virtually certain there will not be another large price rise reported for June and there could be a drop in this index, as was the case from December 2023 through February 2024.
Vehicle Insurance Index Continues to Moderate
The increase in the vehicle insurance index has been a huge factor driving inflation in the CPI. Over the last year, it has risen 20.3 percent, adding 0.52 percentage points to the overall inflation rate and 0.65 percentage points to the core inflation rate. In May it fell 0.1 percent. While the drop in the insurance index may not continue, moderation in the inflation rate in this component will make a large difference in the overall rate of inflation.
Overall Trend of Slowing Inflation Continues
While the pattern has not been entirely smooth, inflation has fallen sharply from its peak two years ago when the monthly inflation rate hit 1.2 percent and the year-over-year rate stood at 9.0 percent. The major item preventing a more rapid slowing is the persistence of high shelter inflation which is the result of leases signed when rental inflation was higher. If we had a measure of rental inflation based on the rents of currently marketed units we would be very close to the Fed’s 2.0 percent target.
There are concerns about inflation in other areas, but no more than would be the case in the years prior to the pandemic, with the notable exception of auto insurance. If the pattern of sharply higher premiums, driven by rising claims, is broken, it will remove the one major force driving inflation outside of rent.
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