Inflation eases, but keep an eye on goods prices
Louise Collis, Senior Economist
Peter Bernstein, Chief Economist pbernstein@rcfecon.com, 312-431-1540 x1515
March 12, 2025
The Current Situation
After a rocky start to 2025, February CPI was better than expected, with prices increasing 0.2%, resulting in a 12-month inflation rate of 2.8%. Core prices, which exclude food and energy, were also up 0.2% in February and have risen 3.1% from a year ago.
In early 2021, inflation was first driven by goods, which make up 36% of the weight of the CPI. Energy prices led the rise, with motor fuel seeing year on year increases over 50%. Food, and cars and trucks also saw large increases during that time. Higher fuel prices fed into the production prices of other goods over 2021. However, goods prices were stable by early 2023 and have been below the Fed target of 2% since May 2023. A concern here is that tariffs would mostly affect goods prices and could reverse the progress on inflation we have seen.
Prices for services have a completely different story. The index for services, which accounts for 64% of the weight of the CPI, is made up of shelter (35% of CPI), energy services (mainly household gas and electricity), medical, transport, communication, recreation, and education services. The prices of most of these services took longer to increase but have also been much slower to return to target. We’ve written previously about housing, but the services story is not all housing, and the index of ‘Services less rent of shelter’ (which makes up 29% of the CPI) shows an almost identical pattern to the full Services index in the figure above.
One fly in the ointment is that a large factor in Service prices is wages. BLS data released last week showed that Average Hourly Earnings were up 4% for the year – good news for workers, but a hint to how difficult it may be to bring down inflation. Until Services inflation is tamed, we will not see a return to the Fed target of 2% inflation.
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% of the typical consumer’s budget; it has a weight of 8.04 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 February, 63% of the weighted CPI showed rising or stable inflation – better than the January number, but the second highest since last April. 9% of the index showed deflation.
RCF Inflation Scorecard: February 2025
Our second metric is the share of the index for which the most recent month’s inflation exceeded 0.2%. 74% of the weighted CPI saw a greater than 0.2% price increase in February, a monthly rate that corresponds to the Federal Reserve’s target inflation rate of 2% per year. There is often a jump in prices in January and then some stabilization in February, but that did not occur this month. Despite a smaller month-to-month increase in the overall CPI in February, more of the CPI had above target monthly inflation.
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 February was higher or lower than monthly inflation in January. Deflation means prices fell in February vs. January.
Highlights:
- Food at home was flat in February following steep rises in January. Food away from home is up 0.4%, and up 3.7% for the year.
- Rent and Owners’ equivalent rent both rose 0.3%, the same monthly increase we saw in January and December. Not bad news, but no good news here. Lodging away from home, mainly hotel prices, were stable after a large increase in January.
- Other sub-categories of housing, such as Household energy and Water, sewer, trash collection are well above target, jumping more than 1% for the month.
- New vehicle prices fell and are down 0.3% for the year. Used car and truck prices have been volatile – with huge increases in 2021, and then flat or falling for the last two years. But they were up 0.9% in February following a 2% increase in January, suggesting a possible return to a more inflationary phase.
- Motor fuel is down 0.9% for the month, and down 3.2% for the year. Motor vehicle insurance has had yearly inflation of over 10% since September 2022.
- Public transportation is down 3.4% for the month, mainly driven by airfares, which were down 4% for the month and down 0.7% for the year.
- While we track monthly inflation and found that 24% of the weighted CPI met the monthly target of 0.2% inflation, over 39% of the index meets the target of 2% annual inflation.
