NAA Inflation Tracker: May 2024

CPI, Latest Release, April 2024  

After three months of higher-than-expected inflation, April’s reading of both headline and core CPI came in largely as expected. Headline CPI was up 3.4% while core rose 3.6% year-over-year, the lowest rate since April 2021. Both measures increased 0.3% over the month, cooler than last month’s 0.4%. Gasoline and shelter costs were responsible for more than 70% of the increase in headline CPI this month. On the core side, car insurance and apparel were the main drivers, rising 1.8% and 1.2%, respectively. 

CPI for Housing, April 2024 

The CPI includes two measures for shelter costs: owners’ equivalent rent (OER) and rent of primary residence, both of which are self-reported. Together, they comprise about one-third of CPI. Both rates decelerated further in April, with rent up 5.4% and OER up 5.8% year-over-year. On a monthly basis, rents increased just 0.3% for the second time this year, which was the average in 2019. OER continues to outpace 2019 levels, however, rising 0.4%.

The New Tenant Rent Index, which calculates prices renters would face if they changed housing units every period, was released by the Bureau of Labor Statistics in April for Q1 2024. It showed a quarterly decline of 1.0% and a slight increase of 0.4% year-over-year. This level of magnitude, while not precisely aligned, is much closer to private sector data compared to traditional CPI measures of rent costs. 

Super Core Inflation, April 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. Super core prices rose by their lowest levels this year, 2.1% year-over-year and 0.2% month-over-month. This reading was especially welcome after three consecutive months of price gains in the 0.5%-0.6% range. 

Inflation Expectations, April 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 Fed’s index jumped to 3.3% from a steady 3.0% reading for the prior 4 months. Consumers are expecting higher price increases across the board, including for homes, gas, food, medical care, college education and rent. The Michigan index also experienced a 0.3 percentage point increase last month, with consumers expressing concern that inflation, unemployment and interest rates will be moving upwards over the next 12 months. The preliminary reading for May shows yet another 0.3 pp surge, which if it holds, would be the highest since last November. 

Wage Growth vs. Employment Cost Index, Q1 2024

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.

ECI and wage growth have only varied by -0.2% to +0.2% over the past six months, but they both remain elevated, rising 4.2% year-over-year, way off from what the Fed would like to see, about 3.5%.  The bright spot for wages comes by way of monthly data, which is showing signs of deceleration. Using a 3-month moving average, wage growth in April was at its lowest level in about 3 years. 

What to Watch in the Next Month 

• The Fed’s next meeting is June 11-12, the same day May CPI will be released. The Fed will also be updating economic projections at that time, which will provide a good indication of when rate cuts might occur. The CME FedWatch tool puts the highest probability of the first cut at the September meeting, in line with other forecasters. 

• With consumers the driving force behind the economy, recent reversals of sentiment, which had finally been on the upswing, are somewhat concerning and bear monitoring in the coming months. 

Next Tracker: June 12, 2024