Inflation Seems Stuck at 2.5% as Shelter Prices Continue to Rise
Peter Bernstein, Chief Economist pbernstein@rcfecon.com, 312-431-1540 x1515
The Current Situation
The year-over-year inflation increased in October to 2.6% from September’s 2.4% reading. Though not a big change, the monthly data show no progress toward the Fed’s 2% goal. Core inflation (excluding food and energy) was stable in October at 3.3%, no lower than it was in June. Producer prices are up 2.4% vs. a year ago, yet another above 2% inflation reading. Thus, while inflation has fallen dramatically over the past two years, there has been no progress over the past few months.
Shelter prices continue to drive up inflation. Rent and owner’s equivalent rent prices are up 4.6% and 5.2%. respectively over the past year. Take out shelter, and the rest of the CPI is up just 1.3%, the fifth straight month that this measure has been below 2%. Our view is that we are in a low inflation economy with a housing problem, though the producer price data suggest that some broader inflationary pressures are still in play.
We do not expect the October data to alter the Fed’s plan to cut rates by 0.25 in December, and we expect that further rate cuts will occur in early 2025. However, many of the incoming Trump administration’s proposals have the risk of increasing inflation. How those campaign statements translate into actual policy will likely determine whether the Fed continues to cut rates throughout the next year.
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). Our second metric is the share of the index for which the most recent month’s inflation exceeded 0.2%, in line with a 2% annual rate.
In October, 19% of the weighted CPI experienced a price decline and another 26% saw lower monthly inflation than in September. But 44% of the CPI saw higher monthly inflation, led by owner’s equivalent rent which by itself is more than a quarter of the weighted CPI. Overall, close to half the CPI saw deflation or lower inflation while close to another half saw higher inflation.
RCF Inflation Scorecard: October 2024
Our second metric was less balanced with 62% of the weighted CPI having an October price increase of more than 0.2%. That was an improvement from September’s 70%, but still shows that the prices of most of the CPI are rising faster than the Fed’s target.
We have been confident that 2% inflation is a matter of when, not if. But the “when” continues to be pushed further and further into the future. 2025 will be a crucial year. Either inflation will fall to 2% as we have expected, or possibly, it will spike again as it did in early 2024, forcing the Federal Reserve to re-evaluate its interest rate plans for the year. As always, time will tell.
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 October was higher or lower than monthly inflation in September. Deflation means prices fell in October vs September.
Highlights:
- Some good news from the October CPI report is that food price inflation was low with food at home (aka grocery) prices rising 0.1% and food away from home (aka restaurant up 0.2%. Year-over-year grocery price inflation was just 1.1%.
- Household furnishings and apparel prices both fell in October and are basically unchanged from a year ago. Motor fuel prices fell as well and are down 12.5% since October 2023. And motor vehicle insurance prices finally dropped, falling 0.1% in October though they are still up 14% over the past year.
- As noted earlier, shelter prices continued to rise faster than most other categories of the CPI. Rent was up 0.3% in October while owner’s equivalent rent increased 0.4%. A sliver of good news was than the year-over-year rent increase of 4.6% was the 18th straight month of lower annual rent inflation since peaking at 8.8% in April of 2023.
- New vehicle prices were unchanged in October and down 1.3% from a year ago. However, used car and truck prices rose a startling 2.7% in October, though they remain lower than they were a year earlier.
- Average hourly wages were up 4% year-over-year in October, again outstripping inflation. The Fed views 3.5% annual wage increases as consistent with 2% inflation. Both numbers are currently 0.5% higher than those levels but for workers, wage gains of 1.5% above inflation are surely welcome.
