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August 2024 CPI Report: Inflation cooled, edging closer to the Fed's target

September 12, 2024

The August 2024 CPI report moderated to 2.5% year-over-year, cementing the likelihood that the Fed will begin cutting rates next week.

Key takeaways

The August 2024 Consumer Price Index (CPI) rose 0.2% month-over-month (MoM) and 2.5% year-over-year (YoY), the smallest annual increase since February 2021.
There was an unexpected rise in core inflation in August that was driven by a strong increase in shelter and transport services prices, which we do not think will be sustained.
Regardless, the big picture is that this data represents something of a "draw" – it doesn't suggest a reacceleration of inflation, but it doesn't meaningfully progress the core disinflation narrative either.
In our strategists’ view, this report is a mixed bag for the Federal Reserve (Fed), but they do not believe it will sway the Fed from cutting rates next week. While this report highlights there are still pockets of strength in portions of CPI, overall, our strategists view the report as further progress on the way to the Fed’s 2% inflation target.

Contributors

John Veit

Vice President, J.P. Morgan Wealth Management

Cristina Dwyer

Analyst, J.P. Morgan Wealth Management

The August 2024 Consumer Price Index (CPI) rose by 0.2% month-over-month (MoM) and cooled to 2.5% year-over-year (YoY) from 2.9% YoY in July.¹ This marks the smallest annual increase since February 2021 and suggests that inflation is well on the way to the Federal Reserve’s 2% target.

Core CPI (excluding food and energy) rose slightly more than expected in August, driven by a strong increase in shelter and transport services prices.² Regardless, the big picture is that this data represents something of a "draw" – it doesn't suggest a reacceleration of inflation, but it doesn't meaningfully progress the core disinflation narrative either.

Headline CPI findings

The fall in August’s headline CPI was primarily driven by declines in fuel and goods prices. This offset price gains elsewhere, in particular in the services prices such as rent, airfares and car insurance.³

The energy index fell 0.8% MoM in August, following no change in July, and fell 4% YoY. The monthly decline was attributed to a 0.6% drop in gasoline prices, 0.7% drop in electricity prices and 1.9% drop in natural gas prices. ⁴ Any weakness in energy prices later this year will help further reduce inflation.

The food index increased 0.1% MoM, following a 0.2% rise in the prior two months, and 2.1% YoY. The food away from home index increased 0.3% MoM, while the food at home index was unchanged.⁵

Our strategists expect slowing inflation, along with wages that remain supportive, to continue to enhance consumer purchasing power. This will likely bolster consumer spending in the near-term.

This chart shows the contributions of various subcomponents of the CPI index to the overall CPI index from February 2020 to August 2024.

Core CPI findings

Core CPI (excluding food and energy) rose by an unexpectedly stronger 0.3% MoM and by 3.2% YoY, unchanged from July.⁶ The monthly rise was fueled by a strong increase in shelter and transport services prices, which we do not think will be sustained. Despite the stronger monthly rise, average inflation over the past three months moved closer to 2% annualized, easing some concerns over August’s hotter than expected print.

Core services prices were up 0.4% MoM in August, boosted by the sticky shelter component. Shelter inflation, which accounts for a third of the total inflation basket, increased by 0.5% MoM – the largest rise since the beginning of the year – and 5.2% YoY. Within the shelter component, owners’ equivalent rent (OER) reaccelerated by 0.5% MoM in August and the rent index rose by 0.4% MoM.⁷

The resurgence in OER indicates that shelter inflation has ticked up in the past two months. The rise in OER was broad-based across the U.S., in contrast to the unexpected rise in rental prices a few months ago that was mostly concentrated in New York City. As home price growth is slowing and rents on new leases are rising at a slower pace, our strategists expect shelter inflation to further moderate over the next year.

Within core services, transportation services prices also surprised to the upside, up 0.9% MoM, the highest level in four months. This was driven by a 3.9% rise in airfares, following five consecutive monthly declines. That said, this component is volatile month to month and we don’t view the rise in August as sustainable due to the recent fall in global oil prices.⁸

There were also price increases in motor vehicle insurance and maintenance prices, which have risen significantly this year – but going forward, we expect them to soften.⁹

Core goods prices fell 0.2% MoM in August, following a decline last month. This fall was driven by a 1% decline in used cars and trucks prices, following a 2.3% decline in July, and household furnishings and operations. Apparel prices increased, but not by enough to offset these declines.¹⁰

Going forward, our strategists expect core inflation to moderate this year as the economy slows and the labor market becomes more balanced.

Possible implications for the Fed

In our strategists’ view, this report is a mixed bag for the Fed, but they do not believe it will sway the Fed from cutting rates next week. While this report highlights there are still pockets of strength in portions of CPI, overall, our strategists view the report as further progress on the way to the Fed’s 2% inflation target.

Fed Chairman Jerome Powell made it clear in his Jackson Hole speech that the progress made on inflation up to this point is sufficient to justify the start of rate cuts – this report doesn’t change that.¹¹ In conjunction with last week’s labor market data, the odds of a 25-basis point cut versus a 50-basis point cut were viewed as a toss-up, but today’s inflation data tips the scales in favor of 25 basis points.¹²

Our strategists think prospects for a gradual – rather than aggressive – rate cutting cycle should be embraced by investors. That would reflect broader economic health and a normalization of activity as the vestiges of pandemic-era distortions fizzle away.

For more information on how this economic data may impact your investment strategy, consult your J.P. Morgan advisor.

References

U.S. Bureau of Labor Statistics (BLS), “Consumer Price Index Summary.” (September 11, 2024)

Ibid.

10.

Ibid.

11.

Board of Governors of the Federal Reserve System, “Review and Outlook.” (August 23, 2024)

12.

Bureau of Labor Statistics (BLS), “The Employment Situation – August 2024.”

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Key takeaways

Contributors

Headline CPI findings

Core CPI findings

Possible implications for the Fed

References

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Core CPI findings

Possible implications for the Fed

References

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