Overall Inflation Continues Move to 2% but Core Inflation Remains Elevated
Peter Bernstein, Chief Economist pbernstein@rcfecon.com, 312-431-1540 x1515
The Current Situation
Consumer prices rose 0.2% in August reducing the year-over-year inflation rate to 2.5%, another milestone in the long but steady path to the Federal Reserve’s 2% goal. However, core inflation (excluding food and energy prices) remains above 3.0% and signals that some more work is needed to reach a consistent low-inflation environment. The culprit, as so often has been the case, is shelter prices (rent and owner’s equivalent rent). Excluding shelter, annual inflation in August was just 1.1% and has been under 2% for most of the past 15 months.
One source of the drop in annual inflation in August was that this month’s 0.2% increase replaced the August 2023 increase of 0.5%. A similar result is likely next month when September 2023’s 0.4% increase will be removed from the annual inflation calculation. In other words, the recent monthly data continue to show lower inflation than the annual measure. Over the past four months, the CPI has increased a total of just 0.3%, an annualized rate below 1.0%. Core inflation during that time has only been 1.5% annualized.
Importantly, monthly inflation no longer needs to decline to reach the Fed’s 2% goal. Instead, it is only necessary that monthly prices continue to increase at their recent moderate pace.
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.
Both our metrics show the economy reaching that 2% rate. In August, prices fell for a little more than one-quarter of the weighted CPI, the second-highest share of categories with deflation in the past year. Inflation declined for another quarter of the weighted index. Less than half (42%) of the weighted CPI had higher inflation in August than July meaning that more than half of the CPI experienced either deflation or falling inflation. The share of the CPI with deflation or falling inflation has exceeded the share with rising inflation for six straight months.
Our second measure shows an approximately even split between categories with inflation above 0.2% in August (49%) and categories at or below 0.2% inflation in August (51%). Thus, the median inflation rate across our 20 components was 0.2% in August.
RCF Inflation Scorecard: August 2024
August’s inflation data are consistent with the Fed cutting interest rates at its September meeting. However, still-high core inflation reduces the likelihood of a 50-basis point cut. August Core PCE data – the Fed’s preferred inflation measure – will be released after the Fed meeting. A favorable number could lead to a 50-point cut in one of the two Fed meetings occurring before the end of the year.
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 vs. July.
Highlights:
- Food at home (grocery) price inflation has ended with prices flat in August and up just 0.9% in the last year. Food away from home (restaurant) prices continue to rise, up 0.3% in August and 4.0% from a year ago.
- As we noted in our introduction, shelter prices were the exception to the otherwise low inflation environment. In August, rent prices increased 0.4% and owners’ equivalent rent rose 0.5%. Both measures are up at least 5.0% from a year ago. The long-awaited slowdown in rent increases has yet to occur, though this is likely a function of the dynamics of housing supply and demand, more than a reflection of general inflationary pressures.
- Among the categories that saw price declines in August were household energy, household furnishings, used cars and trucks, motor fuel, medical care, and recreation. Gas prices are down more than 10% from a year ago and used car and truck prices have dropped 20% from their peak in February 2022.
- In addition to shelter prices, other contributors to inflation in August were lodging away from home, motor vehicle insurance, vehicle maintenance and repair, and public transportation/airfares. But these categories represent only 6% of the CPI demonstrating that shelter prices (34% of the CPI) are the main drivers of inflation.
- While we believe monthly data provide the best measure of current conditions, it’s worth noting that 40% of the CPI is at or below 2% annual inflation, while 15% of the index had lower prices in August than a year ago.
