July 11, 2024

The CPI fell 0.1% in June after having been unchanged in May. The year-over-year increase is currently 3.0%.  We expect the CPI to increase 2.9% in 2024.

Food prices rose 0.2% in June after climbing 0.1% in May.    In the past year food prices have risen 2.2%.  Economists typically subtract food and energy prices from the CPI and focus on the so-called “core” rate of inflation.  That is because these two categories are extremely volatile.  They might go up for a few months but then reverse direction and decline almost as quickly as they rose.

Energy prices fell 2.0% in both May and June    In the past year they have risen 0.9%.

The core CPI rose 0.1% in June after gaining 0.2% in May.    The  year-over-year increase now stands at 3.3%.  The core CPI is decelerating but further progress will be slow.  For the year as a whole we expect the core CPI to increase 3.1% but then slow in 2025 to 2.6%.

At the moment, goods sector inflation is declining slowly as consumers have been spending less money on goods but more on services. Core goods sector inflation has declined 1.7% in the past year as supply constraints have disappeared.  However, inflation in the core service sector (which is twice the size of the goods sector) has been steadily rising and has climbed 5.0% in the past year.  This is important because services make up two-thirds of the entire CPI.

Prices in the service sector are to a large extent being driven by housing.  Home prices have risen every month since January 2023 but they seem to be slowing.

The shelter component of the CPI rose 0.2% in June after climbing 0.4% in both April and May.  The year-over-year increase now stands at 5.1%. This is a big deal because rents represent one-third of the entire CPI index.  A 5.1% increase in one-third of the entire CPI index is not at all consistent with an overall inflation rate of 2.0%.  .We expect the shelter component to rise more slowly between now and yearend.


This is because there is a good correlation between the shelter component of the CPI and what happens to the Case Shiller index of home prices with a lag of about 15 months. This means that the shelter component should slow as the year progresses which is one reason that the core inflation rate should continue to shrink in the months ahead.

The two of the worst performing service sector components in recent months have been automobile insurance and auto repairs which in the past year have risen 19.5% and 6.7%, respectively.  After big gains in the April-August period last year, auto repair costs settled down in recent months.  Auto insurance has risen sharply in the past two years but, like automobile insurance, it has settled down in the past couple of months..  Higher car prices, rising car repair costs (largely labor), an increase in disaster-related claims, and theft and vandalism in high crime areas of big cities are the primary factors behind the gain.

The inflation rate surged in 2020 and 2021 because of the dramatic growth in the money supply.  Typically, M-2 rises at about a 6.0% pace.  But when the Fed purchased $4.0 trillion of government securities back in the spring of 2020, money growth soared.  It continued to grow rapidly right up through March of 2022.  Since then the Fed has been shrinking its portfolio and that has caused the money supply to decline.  Currently, the level of M-2 stands $0.7 trillion higher than its desired 6.0% growth path.  That means that the economy currently has $0.7 trillion more liquidity than it needs.  If the Fed continues to shrink its portfolio the excess liquidity should be nearly eliminated by yearend.

We expect the core CPI to increase 3.1% in 2024.  It will take another two years for the core CPI to come close to the Fed’s 2.0% inflation target.

Stephen Slifer


Charleston, SC