A Step Back in the Inflation Fight
Peter Bernstein, Chief Economist, pbernstein@rcfecon.com, 312-431-1540 x1515
The Current Situation
Consumer prices rose 0.6% in August, pushing the year-over-year inflation rate to 3.7%, up from last month’s 3.2% rate. The increase in the CPI was mostly due to a more than 10% increase in gasoline prices. Core prices rose a more subdued 0.3% in August, lowering its year-over-year inflation rate to 4.3% from last month’s 4.7% rate. But all prices matter to consumers and the August increase means that it is likely that incomes rose less than prices during the month. This is a break from the situation during most of this year in which households were seeing real increases in their incomes.
Over time, overall inflation and core inflation tend to be similar. And we are seeing that relationship develop. For a while, core inflation was less than overall inflation, then more, and now they are about the same. The decline in the core rate is probably more indicative of the future trend in inflation. Nonetheless, the August data suggest that the “last mile” toward the Fed’s 2% goal will be much slower than the pace of the reduction in inflation we have seen since last year.
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 8.7% of the typical consumer’s budget; it has a weight of 8.73 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). Because deflation is showing up across more categories, we’ve added a separate measure of the total weight of deflation within the CPI index.
Our second metric is the share of the index for which the most recent month’s inflation exceeded 0.2%, a monthly rate that corresponds to the Federal Reserve’s target inflation rate of 2% per year.
In August, 9% of the weighted CPI showed deflation, 35% showed slowing inflation, and 47% showed rising inflation. [The rest of the index had stable inflation in August.] Thus, the downward and upward contributions to inflation were essentially balanced in August. That reflects some deterioration from recent months when the weight of deflation and lower inflation exceed the weight of rising inflation.
Our second metric shows that 57% of the weighted CPI had an August inflation rate above 0.2%. That, too, was a step back from July when just 46% of the weighted index had monthly inflation above 0.2%. For perspective, in August 2022, 67% of the weighted CPI had a monthly inflation rate of 0.2%.
Taken together, our two metrics indicate that the large decreases in inflation are behind us, and we can expect that the coming months will likely see a choppy path toward lower inflation.
RCF Inflation Scorecard: August 2023
Analysis of Individual Components of the Consumer Price Index
Sources: Bureau of Labor Statistics and RCF Calculations, 1. Inflation direction indicates whether monthly inflation in August was higher or lower than monthly inflation in July. Deflation means prices fell in August compared to July.
Highlights:
- Motor fuel prices jumped 10.7% in August, adding 0.35% to the August CPI. Even so, fuel prices are 3.7% lower than they were in August 2022.
- Food-at-home prices rose just 0.2% in August and are up a relatively modest 3% from a year ago. Food-away-from-home continues to see higher inflation: 0.3% in August and 6.5% vs. a year ago.
- Used car and truck prices continued to fall, dropping 1.2% in August and down 6.6% vs. a year ago. New vehicle prices rose 0.3% and are up 2.9% compared to August 2022.
- There was some improvement in shelter cost inflation, which has been a major contributor to higher inflation over the past year. Rents rose 0.5% in August, which though higher than July’s increase, is lower than what we have seen for most of the last two years. Owners’ equivalent rent price rose just 0.4%. Even so both measures of shelter costs are up more than 7% year-over-year.
- Overall, 13 of our 20 components had higher inflation in August than July, though several of them have lower weights in the CPI index. Nonetheless, the presence of high inflation across so many different categories indicates that even excluding fuel prices, we are still living in an inflationary environment, albeit less severely than we were last year.
- Looking back, the CPI increased 0.4% in September 2022 while core prices rose 0.6%. Looking ahead, any values lower than those in September 2023 will result in declines in next month’s year-over-year inflation. That is what we expect but appreciate that actual data have a way of confounding expectations.
