Headline Inflation Rises but Other Signs Show Promise
Peter Bernstein, Chief Economist, pbernstein@rcfecon.com, 312-431-1540 x1515
The Current Situation
The CPI increased 0.4% in February, raising the 12-month inflation rate to 3.2% from January’s 3.1% rate. Core prices also rose 0.4%, though that had the effect of reducing its year-over-year inflation rate from 3.9% to 3.8%. Overall inflation fell from 9% in June 2022 to 3% in June 2023 but has hovered around that level ever since. Similarly, core inflation has declined just 1% since mid-2023. On the surface, it appears that progress on inflation has stalled at a level above the Fed’s 2% target.
Below the surface, however, there are some encouraging signs. First, the main source of higher-than-target inflation remains shelter costs (rent and owner’s equivalent rent) which represent more than one-third of the CPI and are up about 6% over the past year. Excluding shelter, inflation has been at or below 2% for nine straight months. Second, as our Scorecard will detail, most of the individual components of the CPI showed declining inflation in February. Finally, other measures of inflation have consistently been lower than those based on the CPI. Core PCE inflation – the Fed’s preferred measure – has fallen to 2.8%. The Producer Price Index, often a harbinger of future trends in consumer prices, is up just 1% over the past 12 months.
Each CPI report brings speculation about the impact on the timing of the Fed’s expected interest rate cuts. The headline CPI numbers do little to accelerate those plans but other metrics suggest a rate cut in May or June is 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. The weights presented in our scorecard reflect BLS updates released in early January.
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.
Both metrics show a noted improvement from January’s numbers, which were themselves some of the worse numbers we’d seen in some time. But in February, 75% of the CPI showed either deflation (11% of the weighted index) or declining inflation (64% of the weighted index). Just 16% of the weighted CPI showed rising inflation in February, a huge turnaround from the 76% weight on higher inflation in January.
In addition, the share of the CPI that had monthly inflation above 0.2% declined from 82% in January to 58% in February, a percentage similar to what is the second half of 2023. Thus, while the monthly increase in the CPI in February was not much different than January, detailed analysis points to January being an outlier and February leading toward lower inflation measures in the near future.
Analysis of Individual Components of the Consumer Price Index
Sources: Bureau of Labor Statistics and RCF Calculations. Inflation direction indicates whether monthly inflation in February was higher or lower than monthly inflation January. Deflation means prices fell in February vs January.
Highlights:
- First, the bad news. Rent increased 0.5% in February, more than the 0.4% increase in January, and up 5.8% from a year ago. There has been much discussion of whether the CPI measure of rent captures up-to-date information. [Zillow’s rent index shows a 3.5% year-ago increase.] Owner-equivalent rent increased 0.4% in February, lower than the 0.6% increase in January, but still up 6% from a year ago.
- Fuel prices were also a contributor to February inflation as they rose 3.7% from January. However, February’s price was 4.2% below the price in February 2023. Rising fuel prices also affected the price of public transportation (which includes airfares), up 2.3% in February vs. January but still lower than a year ago.
- Food at home inflation appears to be mostly over. Prices were flat in February and up just 1% from a year ago. Food away from home prices rose just 0.1% in February but were still up 4.5% over the past year.
- Three of our components, totaling 11% of the weighted CPI, registered price declines in February: apparel, new vehicles, and the catch-all category of “other goods and services.”
- A big source of inflation in February and over the past year has been motor vehicle insurance. The 20.6% price increase since February 2023 has added about 0.6% to the annual inflation rate. Put another way, vehicle insurance is less than 3% of the weighted CPI, but it has been responsible for about one-fifth of the total increase in prices in the last year. With insurance prices rising 0.9% in February alone, this source of inflation is likely to be a continuing problem.
