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The August CPI report showed further progress in inflation making its way down to 2%, setting the Fed up to begin normalizing monetary policy next week with a quarter point rate cut.
Seasonally-adjusted headline CPI rose 0.2% m/m, which brought the year-over-year rate down to 2.6% -- the lowest rate we’ve seen since March 2021. However, core inflation was slightly warm +0.3% m/m and 3.3% y/y, largely due to stickiness in shelter as well as gains in airline fares and transportation services.
Shelter alone accounted for 1.8%-pts of the 2.6% increase in headline inflation this month, but it is predictably coming down at a gradual pace. After rising 0.5% in August, the annual rate for owner’s equivalent rent CPI stands at 5.4% compared to its peak of 8% y/y. Meanwhile, Zillow’s Observed Rent Index shows rent inflation for new leases has stabilized around 3.5% y/y for about a year now, compared to its peak of 16% in the post-pandemic rental boom. CPI won’t reflect the full magnitude of this swing in market rent inflation, but it is a heavily lagged measure and compared to OER’s steady rate of ~3.5% y/y pre-pandemic, there is scope for this measure to decelerate further in the months ahead.
Indeed, a few more pieces of “good news” on inflation are worth mention:
- Grocery store prices were flat m/m and are only up 0.9% y/y. Indeed, food at home inflation has averaged below 2% y/y since Oct. 2023.
- Apparel prices are up just 0.3% y/y, a very different picture from its once 26% y/y rate in Jan. 2023.
- Car prices are also down nicely, -9.5% y/y for used cars and -1.2% y/y for new cars.
- Auto insurance, one area that has been red-hot this year, is coming off the boil. Prices rose (a still warm) 0.6% m/m, but the annual rate has fallen to 16.5% y/y since peaking at 22.6% in April. More relief here should help broader disinflation given its outsized impact recently.
- Energy prices were also down in August across gasoline, electricity and utilities prices. Relative to a year ago, prices at the pump are down 10%.
While the inflation rollercoaster seems largely under control, it has left prices for a number of goods and services at much higher levels than they were just a few years ago. This is likely one factor constraining consumer sentiment, but it is notable that wage growth has outpaced consumer price inflation for 16 consecutive months now and consumer spending overall remains resilient. Following gains of 1.5% and 2.9% annualized in 1Q24 and 2Q24, we are tracking a solid 3.2% gain in real consumer spending for 3Q24.
The Fed is all but certain to cut interest rates at their next meeting and this report should add to Powell’s pile of “good news”. We continue to expect the Fed will opt to cut by 25 basis points, but the pace and magnitude of the easing cycle thereafter will depend crucially on the Jobs mosaic – where a complex picture with sometimes mixed signals continues to show a broadly healthy economy that is slowing, not stalling.
Shelter accounts for the lion's share of remaining headline CPI
Contribution to y/y % change in CPI, non-seasonally adjusted
Source: BEA, J.P. Morgan Asset Management. "Shelter" includes rent of primary residence, owner's equivalent rent and homeowner's insurance. It does not include the category for hotel lodging.
Data are as of September 11, 22024.