Inflation Remains Stuck above 3%
Peter Bernstein, Chief Economist, pbernstein@rcfecon.com, 312-431-1540 x1515
The Current Situation
The CPI increased 0.4% in March, raising the 12-month inflation rate to 3.5%. Core prices also increased 0.4% resulting in a 12-month core inflation rate of 3.8%. Meaningful progress on reducing inflation appears to have stalled. In fact, data from the first three months of the year show price pressures worsening. The March price increases undercut the view that higher inflation readings in the first two months of the year were a fluke, not a trend. But over the first three months of the year, the annualized inflation rate jumped to 4.6% compared with just 1.9% in the last three months of 2023.
Another disturbing feature of the recent monthly data is that inflation is no longer just about shelter costs (rent and owners’ equivalent rent) and as shelter inflation declined, so would the overall rate. Indeed, shelter inflation has been gradually diminishing but the CPI excluding shelter in March was up 2.3% over the past year, the highest annual increase since April 2023.
A year ago, the conventional wisdom was that inflation would continue declining as would the rate of employment growth. The key question was whether the economy would reach 2% inflation without employment growth turning negative. So far in 2024, the story has been the exact opposite. Inflation has picked up as has employment growth. Both developments suggest the Fed’s expected rate cuts will come later rather than previously expected. At another level, one wonders whether monetary policy is as powerful as people assume given that high interest rates have recently done little to reduce inflation or slow the economy.
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.
RCF Inflation Scorecard: March 2024
Our first metric shows that monthly inflation in March was mostly stable. Indeed, 36% of the weighted CPI has the same monthly inflation rate as in February. Beyond that, 33% of the CPI showed either declining inflation or deflation in March while 28% showed rising inflation compared with February.
Our second metric shows that 65% of the weighted CPI components had a monthly inflation rate in March above 0.2%. That’s worse than the 58% reading for February and, outside of January’s 82%, the worse reading in almost a year. Taken together, our metrics indicate that monthly inflation has been stable. The problem, of course, is that stable inflation is not the goal when inflation is too high.
Analysis of Individual Components of the Consumer Price Index
Sources: Bureau of Labor Statistics and RCF Calculations. Inflation direction indicates whether monthly inflation in March was higher or lower than monthly inflation in February. Deflation means prices fell in March vs. February.
Highlights:
- Let’s talk cars. Buying one is getting cheaper. New and used vehicle prices both fell in March and are lower than they were a year ago. But owning a car has gotten much more expensive. In March, Fuel prices were up 1.6%, vehicle insurance was up 2.6%, and maintenance/repair costs were up 2.6%. Compared to a year ago, auto insurance prices are up 22% and maintenance/repair costs are up 8%.
- Food at home (e.g., grocery) prices were unchanged in March following an unchanged reading for February. That aspect of inflation is mostly over with grocery prices up just 1.2% from a year ago. Food away from home (e.g., restaurant) prices are up 4.2% compared to a year ago, perhaps reflecting higher labor costs in that industry.
- There is a hint of goods news on shelter prices. Rents were up 0.4% in March, lower than February’s 0.5% monthly increase. Owner-equivalent rent also rose 0.4% in March. Both are up close to 6% on a year-over-year basis, but those are the lowest annual increases since the middle of 2022.
- Although inflation remains too high, five of our 20 CPI components had lower prices in March than a year ago, and five others had price increases of less than 2%.
