Inflation cools to March 2021 pace

August 14, 2024

The CPI rose 0.2% in July, double the monthly pace of June. That translates to a 2.9% increase from a year ago after rising 3% in June. It is the slowest annual pace since March 2021. The year-on-year comparisons will become more difficult; that will not stop the Fed from cutting rates.

Prices at the gas pump were unchanged but are down 2.2% from a year ago. Food at grocery stores edged up 0.2% during the month but only 1.1% from a year ago. Food away from home rose only 0.2%, half the pace of last month. Fast-food restaurants have been discounting to lure cash-strapped consumers back to their establishments. Consumers have begun to push back on fees at full service restaurants. It is working; those prices barely budged in July.

The Core CPI, which excludes food and energy, rose 0.2% in July, double the pace of June. The core index increased 3.2%, close to the pace of June. Shelter costs alone accounted for 70% of the rise in core CPI. The pickup in shelter costs was more than expected but we have seen shelter costs moderate from the pace earlier in the year, while real-time data on both rents and home values suggests we should see relief later this year.

Used vehicle prices plummeted, while new vehicle prices edged lower. Vehicle producers have been offering incentives, but financing rates remain extremely elevated. Other goods prices, including apparel, fell reflecting consumer fatigue with higher prices and retailers responding with more sales.

The core services component, which the Fed has been watching closely, was unchanged again in July but still up 4.6% from a year ago. That marks a moderation from earlier in the year but underscores how important it is to see discounting in goods prices return.

Another jump in vehicle insurance costs was offset by an unusual drop in inpatient hospital services and care at elderly homes. Those declines do not look sustainable. Airfares fell.

Taken together with the July producer prices index (PPI) data, which revealed the margin pressure that firms are feeling as they are forced to make discounts, today’s data suggest that the personal consumption expenditures (PCE) will remain contained in July. That is the measure of inflation that the Fed targets. The improvements in inflation have become more broad-based than they were last year, which suggests the cooling we are seeing has legs. This is what the Fed is looking for.