Annual Inflation Falls Below 3%, Shorter-Term Measures Even Lower
Peter Bernstein, Chief Economist pbernstein@rcfecon.com, 312-431-1540 x1515
The Current Situation
Another month of benign inflation data has lowered the year-over-year inflation rate to 2.9%, the first sub-3% inflation reading since March of 2021. Prices rose 0.15% in July after essentially no increases in May and June. As a result, the annualized 3-month inflation rate has fallen to 0.4% – essentially stable prices albeit after a substantial increase over the past three years. Core inflation measures have been running a bit higher – 3.2% vs a year ago and 1.6% annualized over the past three months – but both are well below their peak levels of mid-2022. Further good news came from the Producer Price Index report which showed the PPI increased just 0.1% in July and 2.3% vs. a year ago.
Lower inflation is also helping to boost real incomes. The Labor Department’s measure of average wages has grown faster than inflation for the past 15 months. That should help offset the recent weakness in the job market, enabling continued growth in consumer spending.
With inflation clearly on a downward trend, the Federal Reserve should have no concerns about cutting interest rates at its September meeting and will likely enact one or two more rate cuts before the end of the year. Even without Fed action, market interest rates have already fallen, with mortgage rates reaching their lowest levels since May 2023. That could spur more housing construction and perhaps reduce shelter price inflation, one of the key remaining obstacles to reaching the Fed’s 2% annual inflation goal.
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 July, 53% of the weighted CPI showed rising inflation, but keep in mind this is in comparison to June data which showed no overall increase in the CPI index.
RCF Inflation Scorecard: July 2024
Our second metric is the share of the index for which the most recent month’s inflation exceeded 0.2%, and it clearly reveals reduced inflationary pressures. Only 44% of the weighted CPI saw a greater than 0.2% price increase in July, a monthly rate that corresponds to the Federal Reserve’s target inflation rate of 2% per year. That’s an improvement from the 50% reading in June and the lowest share of above 0.2% monthly inflation since last July.
The apparent contradiction between our two measures – a higher share of the CPI with rising monthly inflation and a lower share with above 0.2% inflation reflects a stabilization of inflation trends at around 0.2% per month.
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 July was higher or lower than monthly inflation in June. Deflation means prices fell in July vs. June.
Highlights:
- As we noted in our introduction, shelter prices were the exception to the otherwise low inflation environment. Rent prices increased 0.5% in July and owners’ equivalent rent rose 0.4%. Both figures were worse than June’s increases and kept year-over-year shelter price inflation above 5%. In fact, these two components were responsible for the entire monthly increase in the CPI in July; exclude them and the rest of the CPI was flat compared to June!
- The price of food at home (aka grocery prices) rose just 0.1% in July and is up only 1.1% vs, a year ago. Food away from home (aka restaurant prices) are up 4.1% from a year ago but the July increase of 0.2% was less than half of June’s monthly rise.
- Both new vehicle and used vehicle prices continue to fall, down 0.2% and 2.3% respectively in July. Compared to a year ago, new vehicle prices are 1% lower while used cars and truck prices are down more than 10%.
- Other categories with lower prices in July than a year earlier include lodging away from home, household furnishings, motor fuel, and public transportation/airfares.
- Motor vehicle Insurance continues to be a source of higher inflation, with its price rising 1.2% in July and 18.6% over the past year. Even though it represents less than 3% of the CPI, vehicle insurance has been responsible for 0.5% of the 2.9% total increase in the overall index in the past year.
