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The September 2024 Consumer Price Index (CPI) report was released last week, and the results continue to show that inflation is gradually easing overall. However, the month’s data also highlights some challenges that remain in various sectors.
Consumer prices rose 0.2% in September, which was slightly above the .1% consensus among economists. This marks a 2.4% year-over-year increase, which is the lowest year-over-year change in inflation since February 2021. Although this is a positive sign of inflation's deceleration, it still exceeded expectations of 2.3% by a small margin. The positive news is that the headline figure’s trend shows that inflation is gradually slowing, providing hope that the Fed's target may be in sight.
Gasoline prices did provide some relief to consumers in September, dropping 4.1%, leading to an overall decline in energy prices, which were down 1.9% for the month. On the other hand, grocery prices surged by 0.4%, the largest monthly gain in nearly two years. This was largely a result of an 8.4% increase in egg prices and a 0.9% rise in fruits and vegetables. Despite this, food prices have risen only 1.3% over the past year, down from the 2.4% pace a year ago and significantly lower than the 14% peak inflation seen in mid-2022.
Core CPI, excluding the volatile food and energy sectors, rose by 0.3% in September, and was also slightly above expectations of .2%. Year over year, core prices grew at 3.3%, slightly up from 3.2% in August. Although the increase was modest, it highlights persistent inflationary pressures in certain areas, particularly services, which continue to keep overall inflation elevated.
Core goods prices rose by 0.2% after several months of deflation, driven by small gains in vehicle prices and a 1.1% rise in apparel prices. Meanwhile, lower prices for medical care and recreation goods tempered the overall rise in core goods prices.
Services inflation remains the primary concern. Core services prices increased by 0.4%, driven by a surge in airfares (+3.2%), motor vehicle insurance (+1.2%), and medical care services (+0.7%). Shelter costs, a key component of the CPI, increased by 0.2%, a smaller rise than in previous months, contributing to the moderation in services inflation. However, shelter costs, which make up more than one-third of the CPI basket, remain high, up 4.9% year-over-year.
As the Federal Open Market Committee (FOMC) prepares for its November meeting, this inflation report presents a mixed picture. On the one hand, headline CPI is moving in the right direction, easing to its lowest annual pace since early 2021. Energy prices continue to decline, and food price inflation is less severe than in previous months. However, the core CPI’s persistent upward pressure, particularly in services, is keeping it above the Fed's 2% target. This may leave the more hawkish members hesitant to cut rates in November, much less another aggressive 50 bp cut. However, with inflation trends continuing to slow on the whole and the labor market showing signs of cooling, we do think it is likely the Fed will at least go with a modest 25-basis-point rate cut.
