Inflation reaches slowest pace in three years

September 11, 2024

The consumer price index (CPI) rose 0.2% in August, the same as July. That translates to a 2.5% increase from a year ago, the weakest annual pace since February 2021 and a significant improvement from the 2.9% increase in July. Prices at the gas pump fell during the month and look poised to fall farther in September, while prices at the grocery store moved sideways. Food away from home edged up slightly, buoyed by a sharp acceleration of costs at employee sites and schools.

Core CPI (excluding food and energy) rose 0.3%, slightly faster than July. That translates to a 3.2% increase from a year ago and tied July for the slowest annual pace since April 2021. Shelter costs, which tend to be a lagging indicator, were the primary driver of the month-to-month pick-up in the core measure. Nearly all of that acceleration was driven by a sharp 2% monthly increase in the costs of lodging away from home, including hotels.

Rents and homeowner’s equivalent rent are running cooler than they were earlier in the recovery but remain well above the pace we saw pre-pandemic. Those increases reflect the shortage of affordable housing and the pent-up demand triggered by millennials aging into their peak home-buying years. We now have the largest generation of thirty-somethings that we have ever seen; they want to buy.

Durable goods prices, which span furniture, appliances and used vehicles dropped for the fifteenth consecutive month in August. The year-over-year decline, which came in at 4.2%, was the largest annual decline since December 2003. Back then, the Fed was cutting rates for fear that a bout of deflation might take root.

Nondurable goods excluding food fell both on a monthly and an annual basis. Back-to-school sales have returned, while big-box discounters are rolling back prices again.

The declines in prices are not enough to keep overall prices from returning to pre-pandemic levels but have helped to cool the pace in overall inflation to less than overall wage gains. That is helping to restore the purchasing power lost to inflation earlier in the recovery.

Service sector inflation, excluding shelter costs, edged up 0.1% after being flat for the previous three months. Those prices increased 4.3% from a year ago, which is still hot but off of the 5% high for the year in May.

Base Effects

A sharp improvement in core inflation during the back half of last year is creating a floor under annual inflation measures in the second half of this year. Those “base effects,” as they are known, will fall out of the data; then the math on year-over-year gains in inflation will get much better, starting in January 2025. The Federal Reserve knows that, which is why Fed officials have made it clear that we do not need to see an additional improvement in inflation to justify a rate cut in September. Today’s data confirm that we remain on track for inflation to come closer to its 2% target in early 2025.