November 13, 2023
(The monthly Consumer Price Index (CPI) is scheduled for release by the Bureau of Labor Statistics on Tuesday, November 14th at 8:30 AM Eastern Time.)
The overall CPI rose 0.4 percent in September after rising 0.6 percent in August. These rises followed three months of very low inflation. The main reason for the large increases was a big jump in gas prices. Gas prices rose 2.1 percent in September and 10.6 percent in August. The core inflation rate had been just 0.3 percent in both months.
Gas prices fell sharply in October, so the overall inflation rate will be lower than the core, likely coming in close to 0.1 percent. The core will probably again be at 0.3 percent, held up in large part by high rental inflation. Inflation in rent has slowed sharply from last fall, but it is still likely to be at 0.5 percent in October.
Medical Care Services
Medical care services account for 6.3 percent of the overall CPI and 7.9 percent of the core. They account for an even larger share of the personal consumption expenditure deflator, since that includes the cost of most medical care services paid for by employers and the government.
Inflation in this component has been surprisingly low for most of the last year. In fact, the overall medical care services index is actually down by 2.6 percent year over year. The big factor here is a 37.3 percent year-over-year drop in the health insurance index. This stems from the peculiar way the CPI measures health insurance prices, as the difference between premiums and payouts for benefits.
This decline will not continue and may well turn around in October. If it does, it can be a major factor pushing inflation higher. The other components of the medical services index have also shown erratic patterns. The hospital and related services component had been showing relatively modest inflation, but it jumped by 1.5 percent in September, after a 0.7 percent increase in August. Inflation in this component should moderate in October, but if not, it would mean that medical care costs are substantially outpacing other prices.
New and used vehicle prices had been major factors propelling the inflation of 2021-2022, but are now a dampening force. New vehicle prices rose by 0.3 percent in September, while used vehicle prices fell by 2.5 percent. Year over year, new vehicle prices are up 2.5 percent and used vehicle prices are down 8.0 percent.
Both components have much room to fall further. New vehicle prices are still 20.9 percent above their pre-pandemic level, while used vehicle prices are 36.4 percent higher. By comparison, the price of imported vehicles is up by just 7.4 percent. These indexes had tracked reasonably closely before the pandemic. It is likely that used vehicle prices will continue their sharp decline in October, while the price of new vehicles will be close to flat.
The inflation shown in the rental components (rent proper and owners; equivalent rent [OER]) continues to trend downward as the lower inflation shown in indexes of marketed units is gradually passed on to the CPI index that measures rent in all units. These indexes had been rising 0.8 percent monthly at the end of 2022, the rent proper index rose 0.5 percent in September, while the OER index rose 0.6 percent. These are both likely to rise 0.5 percent in October.
This matters hugely for the CPI, since the rental components account for 31.0 percent of the overall CPI and nearly 40 percent of the core index. With several private indexes of rents in marketed units now showing near flat year-over-year rental inflation, or even slight deflation, we can be certain that inflation in this component will continue to fall well into 2024.
The price of auto insurance continues to hugely outpace overall inflation. It rose 1.3 percent in September and was up 18.9 percent year over year. There are a variety of reasons for this sharp rise. People are getting into more accidents since the pandemic. We also see more damage due to climate-related events. However, this rate of increase may slow.
This component has had a surprisingly large impact on inflation. The September rise added 0.036 percentage points to the overall CPI inflation rate for the month and 0.045 percentage points to the core rate.
Food and Restaurant Prices
The rate of inflation for store-bought food has slowed sharply in the last year. The index was up just 0.1 percent in September and has risen 2.4 percent, year over year. We are likely to again see moderate inflation in food prices in October and through the rest of the year.
The price of most underlying commodities, like wheat, corn, and beef have largely fallen back to their pre-pandemic level or even lower. Many major processors have been complaining about a loss of pricing power, which means that they have little ability to increase markups, and are reducing them in many cases. This should mean that inflation will be moderate for store-bought food for the foreseeable future.
Restaurant prices have substantially outpaced inflation in store-bought over the last year, rising 6.0 percent over the last year and 0.4 percent in September. This matters not only for its weight in the overall CPI, but also because it is a large portion of the category of core services, excluding rents, that the Fed has chosen to make a major focus.
Part of the story here has been rapid increases in wages for restaurant workers. However, in recent months, the pace of wage gains in restaurants has slowed sharply and is roughly in line with overall wage growth. This should reduce cost pressures and translate into more moderate inflation in restaurant prices.
Overall Inflation Picture – Continued Slowing in October
With the sharp drop in gas prices in October, we should have very good news on the overall CPI. The core rate should again come in close to 0.3 percent, held up largely by the continued high inflation shown in the rental indexes. Whether we end up on the high side of 0.3 percent or the low side will likely depend on erratic components that have a large effect on the index, especially vehicle, health insurance, and used car prices. But the basic story in October should be one of moderate inflation that allows for real wage gains, which should continue through the end of the year.