Inflation Trends and the RCF Inflation Scorecard – December 2024

The Costs of Inflation Have Reduced; The Costs of Fighting it Continue

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

January 15, 2025

The Current Situation

A year ago, we were celebrating having won most of the fight against inflation.  Since that time, it has been a struggle to make gains.  The CPI increased 0.4% in December raising the year-over-year inflation rate to 2.9%.  Producer prices were up 3.3% during the year, reversing a long period of slow growth in business input costs. The silver lining in the December CPI report was that core prices increased just 0.2%, lowering its annual inflation rate to 3.2%.   

Taken together, the recent inflation data indicate a trend towards 3% inflation and little progress toward 2%. The longer we stay at this level, the more entrenched expectations of inflation will become and the more difficult it may be to reach the Fed’s target.  With interest rates high, particularly for mortgages, and labor markets seemingly on solid ground, the foundation is there for the Fed to cut rates.  But without further progress on inflation, those rate cuts will likely be few and far between in 2025. 

Figure with CPI All Items, Core CPI and PPI Final Demand, showing that  all three are trending towards 3%.

There is a lot of uncertainty around the policies of the incoming administration.  Cutting taxes, reducing immigration and increasing tariffs can all be inflationary and we may have to wait and see how and whether these will be implemented.  The cost of shelter continues to be one of the most stubborn categories to nudge, perhaps requiring changes at all levels of government.  Without finding some solutions here, it is hard to see a path to reducing overall inflation.

Wages have continued to rise slightly faster than prices, with private sector average hourly earnings rising 3.9% for the year.  The downside to this is that there may still be some input prices in the form of wage increases that will work through the system, particularly in services.  For the year, goods prices rose just 0.3%, while services (which include shelter) rose 4.4%.  Even removing shelter, Services are up 4% for the year, which says that the story is not all about housing.

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).   In December, 51% of the weighted CPI showed rising inflation – the second-highest monthly value for 2024.  Only 5% of the index showed deflation.

Figure with falling, stable, and increasing inflation, showing that in December, a 51% share of goods and services had rising inflation, and 64% had inflation above the Fed's target.

Our second metric is the share of the index for which the most recent month’s inflation exceeded 0.2%.   64% of the weighted CPI saw a greater than 0.2% price increase in December, a monthly rate that corresponds to the Federal Reserve’s target inflation rate of 2% per year.  While we have had three months with rates higher than this in the last year, it is not suggestive of a downward trend. 

The combination of our two measures suggests stable inflation at a level above the Fed’s 2% target.    

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 December was higher or lower than monthly inflation in November. Deflation means prices fell in December vs. November.   

Highlights:

  • Food at home and food away from home both increased 0.3% in December.  But if you can avoid bacon (up 2% for the month) and eggs (up 3% for the month and 37% for the year) most grocery prices increased less than the 2% Fed target for the year. 
  • Rent and owners’ equivalent rent both rose 0.3%, confirming the recent easing of housing inflation. Even so, shelter prices are up more than 4% from a year ago.  If we exclude these two components from the calculation, CPI less Shelter has been below the Fed’s 2% target for the last 7 months.   
  • Both new vehicle and used vehicle inflation are well above target for the month, up 0.5% and 1.2% respectively in December.  Compared to a year ago, new vehicle prices are 0.4% lower while used cars and truck prices are down 3.4%. 
  • Motor fuel is up 4.4% for the month, but down 3.8% for the year.  Household energy was up 0.8% in December.
  • Several categories (Water, sewer, trash collection; Apparel; Medical care; Recreation) were up just 0.1% for the month, while Household furnishings and Education and communication were flat.
  • Motor vehicle Insurance has had double-digit year-on-year inflation since September 2022 and is up 39% since then.  It’s hard to see how it can keep increasing faster than average prices for so long.