Economic & Financial Consulting Firm in Chicago, Illinois

September CPI Shows Continuation of Inflation Trends

Peter Bernstein, Chief Economist pbernstein@rcfecon.com, 312-431-1540 x1515

The Current Situation

The September CPI report was a case of no news is no news. There are some interesting developments at the price category level (discussed later) but the headline numbers simply confirm existing inflation trends. Overall CPI inflation continued its gradual decline toward 2.0%, while core inflation remained above 3%. For the month, CPI rose 0.2%, the same as in August, and core CPI rose 0.3%, also the same as in August. Measured over the past six months, annualized CPI inflation is 1.6% and annualized core inflation is 2.6%, substantially better numbers than the year-over-year price increases.

Figure with CPI All Items, Core CPI and Core PCE, showing that while CPI All Items has been dropping, Core CPI and Core PCE are higher and flatter.

The stickiness of core CPI inflation remains a concern. Year-over-year, core inflation remained at 3.3%. Importantly, the Fed’s preferred inflation measure (core PCE) is running lower: 2.7%. That’s mostly because the PCE has a lower weight on shelter costs which have been a key contributor to higher inflation. But whether the core rate is 3.3% or 2.7%, underlying inflation remains above the Fed’s 2% goal indicating that while the tide has turned, the battle is not yet fully won.

That said, let’s not lose sight of the bigger picture. Over the past two years, inflation has fallen from a peak of 9.1% to 2.4% without triggering a recession, something few analysts believed possible.

RCF’s Inflation Scorecard

RCF’s Inflation Scorecard is based on analysis of 20 different price series comprising 98% of the total consumer price index. Each of these price series represents a portion of the CPI based on household spending patterns. For example, food purchased for at-home consumption is about 8.2% of the typical consumer’s budget; it has a weight of 8.17 out of a total index of 100.

Our scorecard presents two metrics to track month-to-month price increases. The first metric is the share of the index for which inflation in the most recent month is rising (greater than the prior month’s inflation) vs. the share of the index for which inflation is falling (lower than the prior month) or prices fell (deflation). Our second metric is the share of the index for which the most recent month’s inflation exceeded 0.2%, in line with a 2% annual rate.

By the first metric, September was a good month with 41% of the weighted CPI showing lower inflation and another 10% showing deflation. Only 38% of the CPI showed rising inflation in September (the remainder had stable inflation). However, our second metric tells a different story with prices in September rising more than 0.2% for 70% of the weighted CPI. That’s the highest share of above target monthly inflation since January.

RCF Inflation Scorecard: September 2024

Figure with falling, stable, and increasing inflation, showing that in September, a 38% share of goods and services had rising inflation, and 70% had inflation above the Fed's target.

The apparent inconsistency between our two metrics is because 40% of the CPI had September price increases of 0.3%, just above or 0.2% threshold. But that underscores the key issue of whether underlying inflation is closer to 2% or 3%, a small difference mathematically but a potentially big difference for the Federal Reserve’s future policy decisions.

For now, we think it’s “steady as she goes” and that as more time passes, the 2% goal will be reached.

Analysis of Individual Components of the Consumer Price Index

Table with year-on-year and month-on-month inflation for 20 components of the CPI, making up 98% of the total index.

Sources: Bureau of Labor Statistics and RCF Calculations. 1. Inflation direction indicates whether monthly inflation in September was higher or lower than monthly inflation in August. Deflation means prices fell in September vs August.

Highlights:

Just when you thought it was safe again to go the grocery store, Food at home prices rose 0.4% in September, though they are still up just 1.3% from a year ago. Food away from home (restaurant) prices were up 0.3% in September and 3.9% year-over-year.
Finally, some evidence of moderation in shelter prices. In September, rent and owner’s equivalent rent prices both rose 0.3%, compared to August’s gains of 0.4% and 0.5%, respectively. Their year-over-year increases of 4.8% (rent) and 5.2% (OER) are the lowest since April 2022. Given the high weight of shelter in the core CPI, the slowdown in shelter inflation will be key to getting the core rate down to 2%.
Apparel prices rose 1.1% in September, motor vehicle insurance up 1.2%, vehicle maintenance/repair up 1.0%, and public transportation/airfares rose 2.4%. These categories combine to only 7.6% of the CPI but it shows that even in a declining inflation environment, some categories can still see large monthly price gains.
September saw increases in used car and truck prices (+0.3%) and new vehicle prices (+0.2%) but both remain lower than a year ago. Overall, 15% of the weighted CPI had lower prices this September than last while another 24% had year-over-year inflation below 2%.
We won’t be surprised if the October report shows an increase in the annual inflation rate. October 2023 saw monthly CPI increase of just 0.1%. This October will have to match that low level to keep annual inflation stable.