Inflation Cools in 2024Q2

Inflation as measured by the Consumer Price Index fell 0.1% in June, its lowest monthly growth rate since May 2020. On a yearly basis, inflation rose 3%, down from 3.3% last month and slightly below expectations. Given that yearly CPI inflation peaked at 9.1% in June 2022, two years later it is down by two-thirds, or 6.1 percentage points.

Core CPI inflation, which leaves out volatile food and energy prices, was up 0.1% in June, below expectations for a 0.2% growth rate. Over the past year, core inflation rose 3.3%, its lowest yearly rate since April of 2021.

Gas prices fell in June, by 3.8%, as did prices for new and used cars. Over the past year, the retail gas price is down 2.5%, new vehicle prices are down 0.9% and used car prices are down 10.1%. We’ll say more about food-away-from-home, or grocery, prices in a moment, but grocery inflation was 0.1% in June and has averaged zero so far this year. Also as noted below, housing costs came in softer in June. For other highlights of this morning’s CPI report, see our X thread.

In this post, we wanted to update some of our earlier “bottom-up” inflation analysis, i.e., tracking the growth of the components that comprise the index. Starting with food, while both grocery and restaurant inflation have come down in recent months, yearly grocery inflation has fallen especially sharply, down over 12 percentage points from its peak rate in August 2022 (see Table 1; restaurant inflation peaked in March 2023).

Turning to core inflation, this index can be usefully broken down into three MECE components: housing, core services ex housing, and core goods. In the figure below, each bar is a three-month annualized growth rate for each quarter. E.g., the 2.1% core rate shown for June 2024 represents the annualized growth rate from March to June (also equivalent to the quarterly growth rate for Q2). Note that 2.1% is the lowest CPI core rate since March of 2021.

Each bar also breaks out the contributions to that quarter’s growth rate for the three categories. In 2024Q1 (ending in March), inflation accelerated, driven by higher housing and core services ex housing inflation. At the time, we suspected that this was a temporary pause in the general disinflation trend that had prevailed since the second-half of 2023, and while it is only one quarter, 2024Q2 data suggest disinflation may be back on trend. Both housing and especially core services ex housing slowed in the second relative to the first quarter of this year.

With a similar caveat regarding one month of data, the easing of housing costs in June is a welcome development. We know that rental inflation, particularly for new tenants, has eased in recent months, and that it takes numerous months for this slower inflation to show up in the CPI. CEA’s housing model (see the link to our X thread above) is designed to capture these lag dynamics, and in June its forecast downshifted a bit. This suggests future prints could continue the improvement we saw in June.

To summarize, inflation, and even prices themselves (i.e., the price level vs. the growth rate), fell in a number of consumer-salient categories in June leading the overall index to contract slightly. Housing inflation eased a bit in June, gas and car prices fell, and monthly grocery inflation has averaged zero so far this year. At the same time, the persistently strong US labor market has been generating a pace of wage growth that’s been handily and repeatedly beating price growth. For each of the last 16 months, for example, hourly wages for middle-wage workers have outpaced inflation on a yearly basis, including by 1% in June.

Of course, our work isn’t done, as too many families continue to face high prices, and we will continue to push to lower costs in key areas of family budgets. But the combination of easing prices and rising pay is providing American households with some important and welcomed breathing room.