Key takeaways
- The July 2024 Consumer Price Index (CPI) rose 0.2% month-over-month (MoM) and 2.9% year-over-year (YoY), the smallest annual increase since March 2021.
- However, shelter inflation rebounded in July, up 0.4% from the prior month, following a low 0.2% reading in June. Overall, shelter inflation is on a downward trajectory, but the data is a reminder that the process will take time.
- Outside of the shelter component of the CPI report, we see deflationary readings, particularly in certain categories such as used autos and airfare.
- In our strategists’ view, this is a welcome report for the Federal Reserve (Fed) that should further increase the Fed’s confidence that inflation is on its way back to the 2% target. July’s inflation report, along with the recent jobs report, supports the view of a rate cut, most likely at the next Federal Open Market Committee (FOMC) meeting in September.
Contributors
John Veit
Vice President, J.P. Morgan Wealth Management
By John Veit and Cristina Dwyer
The July 2024 Consumer Price Index for All Urban Consumers (CPI-U) rose by 0.2% month-over-month (MoM), as expected, after falling by 0.1% in June. The year-over-year (YoY) CPI fell to 2.9% from 3% YoY in June,1 the smallest annual rise since March 2021. The easing in headline inflation suggests that inflation is trending in the right direction in the eyes of the Federal Reserve.
The softer inflation data, coupled with July’s weaker-than-expected employment report, highlights inflation and the labor market are coming into a better balance. These developments should increase the Fed’s confidence that inflation is on its way back to the 2% target and position the Fed to begin easing policy, most likely at the September Federal Open Market Committee meeting.
Report highlights
The monthly rise in July’s headline CPI was primarily driven by a 0.4% rebound in the shelter index and a 1% rise in motor vehicle insurance prices. The gain in the shelter index contributed to the majority of the monthly headline CPI increase – this means that rent is the primary reason for the difference between the Fed’s 2% target and the current inflation rate.2
The food index increased 0.2% MoM again in July and 2.2% YoY. The food away from home index rose 0.2% MoM while the food at home index rose 0.1% MoM. Out of the six major grocery store food group indexes, three saw monthly increases while three saw monthly declines. Notably, prices for meats, poultry, fish and eggs rose 0.7% MoM.3
The energy index was unchanged MoM, following a 2% decline in June, and rose by 1.1% YoY. Gasoline prices were unchanged MoM and fell 2.2% YoY.4 While energy prices were mostly unchanged in July, our strategists will keep a close eye on energy prices as they are historically a more volatile component of the inflation basket.
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.
U.S. CPI by components
Year over year percentage change
This chart shows the contributions of various subcomponents of the CPI index to the overall CPI index from February 2020 to July 2024. The chart has two lines representing the Headline CPI percentage change and the Core CPI (excludes food and energy prices from the CPI) percentage change.
- The core CPI began at 2.4%, rose to 6.5% by March 2022 then fell to 5.9% by July 2022. It then increased to 6.6% by September 2022, the highest level since the pandemic. It fell to 3.3% by June 2024.
- The headline CPI began at 2.3% in February 2020, fell to 5.1% in May 2020 and rose to 9.1% by June 2022, its highest level since the pandemic. It then fell to 3% by June 2023 due to the Energy sector’s 1.6% MoM decline.
- The headline CPI fell to 3% by June 2024.
- In June 2024, core CPI rose 3.3% YoY and headline CPI rose 3% YoY. Core services rose 3%, core goods fell 0.4%, food rose 0.3% and energy rose 0.1%.
- In July 2024, core CPI rose 3.2% YoY and headline CPI rose 2.9% YoY. Core services rose 2.9%, core goods fell 0.3%, food rose 0.2% and energy rose 0.1%.
Source: Bloomberg Financial L.P. Data as of August 14, 2024.
Core CPI findings
Core CPI (excluding food and energy) rose by 0.2% MoM, following a milder 0.1% rise in June. Over the past year, core CPI rose by 3.2%, the smallest annualized increase since April 2021.5 Core prices were boosted by a rise in the shelter component, which accounts for about a third of the total inflation basket.
Shelter inflation rebounded in July, up 0.4% from the prior month, following a low 0.2% reading in June. Within the shelter component, owners’ equivalent rent (OER) increased by 0.4% in July and the rent index rose by 0.5%.6 Over the past year, shelter prices rose by 5.1%, driving over 70% of the annual gain in core CPI.
Overall, shelter inflation is on a downward trajectory, but the data is a reminder that the process will take time. The shelter component of inflation needs to decline further for rates to move closer to the Fed’s 2% target.
July’s uptick in the shelter index drove the core services index up to 0.3% MoM, the highest reading since April. The rise in core services prices was also driven by increases in motor vehicle insurance prices, while medical services and airfare prices declined. Core goods prices fell 0.3% MoM, the softest reading for core goods prices in a year, driven by falling prices for used vehicles and apparel.7
Going forward, our strategists expect core inflation to further moderate this year as the economy slows and the labor market becomes more balanced amid pressure from high interest rates.
Possible implications for the Fed
At the FOMC meeting in July, the Fed announced that it would maintain the overnight federal funds rate at the current range of 5.25% to 5.5%. Notably, the Fed signaled it is leaving the door open to start cutting rates in September and the July inflation data reinforces that notion.8
Fed Chairman Jerome Powell reiterated that the Fed’s decision on the direction of rates continues to be made on a meeting by meeting basis with data leading the way.9 Following July’s weaker-than-expected jobs report and producer prices report, the cooldown in July’s inflation data should give the Fed further confidence that inflation is heading closer to its 2% target. This supports our strategists’ view that the Fed will likely cut interest rates in September.
For more information on how this economic data may impact your investment strategy, consult a financial advisor.
References
U.S. Bureau of Labor Statistics (BLS), “Consumer Price Index Summary.” (July 11, 2024)
Ibid.
Ibid.
Ibid.
Ibid.
Ibid.
Ibid.
Board of Governors of the Federal Reserve System, “Federal Reserve Issues FOMC Statement.” (July 31, 2024)
Board of Governors of the Federal Reserve System, “Transcript of Chair Powell’s Press Conference Opening Statement” (July 2024).
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