NAA Inflation Tracker: February 2024
CPI, Latest Release, January 2024
January CPI measures came in higher than expected. Headline CPI increased 3.1% year-over-year, a deceleration from December’s 3.3%; prices rose 0.3% over the month after two months of 0.2% growth. Core inflation, at 3.9%, has been on a steady downward trajectory on a year-over-year basis. However, the monthly 0.4% gain was the highest since May of last year. Drivers of the increase were medical care (0.7%) and shelter costs (0.6%) while prices dropped for used cars and trucks (-3.4%) and apparel (-0.7%).
CPI for Housing, January 2024
The CPI includes two measures for shelter costs: owners’ equivalent rent and rent of primary residence, both of which are self-reported. Together, they comprise about one-third of CPI. In terms of annual percent changes, both measures are at their lowest levels since summer 2022, with rent of primary residence up 6.1% and owners’ equivalent rent up 6.2%. But they diverged widely this month as owners’ equivalent rent increased by double the rate of rent of primary residence, which at 0.3%, experienced its lowest monthly rise since July 2021.
The Bureau of Labor Statistics also tracks rents for new leases on a quarterly basis. The Q4 2023 figure, released last month, showed a 4.7% year-over-year decline in rents for new leases, the largest drop in the data series with coverage going back to 2005.
“Super Core” Inflation, January 2024
Due mainly to lags in CPI shelter data, the Fed has begun to focus more on “super core” inflation, that is, prices excluding food, energy and shelter. Year-over-year, “super core” inflation has been in the 2.0%-2.2% range for the past six months while month-to-month price increases have been stuck at 0.2%. Outside of medical care, significant increases were recorded for pet services (5.6%), sports vehicles including bikes (2.8%) and financial services (2.4%), among others.
Inflation Expectations, January 2024
The Fed tracks 21 different measures of inflation expectations. The data presented in the chart below are inflation expectations one year from now from the Federal Reserve Bank of New York’s Survey of Consumer Expectations and the University of Michigan’s Consumer Sentiment Index. The New York Fed’s measure remained unchanged from last month at 3.0%, with expected price changes decreasing for all goods and services tracked in the survey. The reading for rent, 6.4%, was the lowest since December 2020. Consumers taking the University of Michigan survey expect inflation to be 2.9% next year at this time, also the lowest level since December 2020.
Wage Growth vs. Employment Cost Index, Q4 2023
The Employment Cost Index (ECI) is a quarterly measure of the change in the costs of labor. Unlike average hourly earnings, the series typically used for wage growth, the ECI calculation is not impacted by the change in employment levels among occupations and industries which can significantly skew wage levels. It also includes the costs of benefits to employers. The ECI is considered a purer measure of labor costs and is closely watched by the Fed.
Both the ECI and wage growth continued to moderate, at 4.2% and 4.3% year-over-year, respectively, but remained highly elevated. In the 5 years leading up to the pandemic, the ECI averaged 2.5% and wage growth averaged 2.8%. With job openings still at lofty levels, employers are continuing to attract and retain talent through compensation. Price increases for benefits dropped below 4.0% for the first time since Q4 2021.
What to Watch in the Next Month
- The Fed doesn’t meet again until March 19-20, so it will have plenty of additional data to digest, including the February jobs and inflation reports. Recent remarks by Fed presidents and Chair Powell indicate the Fed is in no hurry to cut rates, given that economic growth has been resilient in the face of high interest rates.
- The January inflation report shifted the highest probability of the first Fed rate cut from May to June, according to the CME Fed Watch Tool.
Next Tracker: March 12, 2024