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February 2024 IPC Report | CEA

We learned this morning that inflation as measured by the Consumer Price Index was 0.4 percent in February and 3.2 percent over the past year. Core inflation, which leaves out volatile food and energy prices to better analyze the underlying inflation trend, was also 0.4 percent for the month and 3 .8 percent over last year.

In this blog, we look at a few categories from the CPI report that determine the overall index through the prism of 6-month annualized changes. Since 1-month data does not reflect the underlying trend and 12-month measurements underweight more recent movements, we prefer to use 6-month variations to increase the signal-to-noise ratio without losing developments opportune. On a 6-month basis, overall prices increased by 3.2 percent and base prices by 3.9 percent.

We break down core inflation into three components: basic goods, basic non-housing services, and housing, then complete the picture with a quick look at energy and food inflation.

Basic goods: As post-pandemic supply chains recovered, goods inflation eased significantly and remained negative from June 2023 to January 2024. In February, core goods prices increased by 0, 1%; however, over the past 6 months, prices have fallen in this category by 1.5 percent. The chart shows how prices of basic goods soared during the pandemic, posting double-digit inflation, as high demand for goods collided with limited supply chains. As supply normalized and demand for goods also declined somewhat, inflation reversed sharply. Given that core goods make up about 20 percent of the overall CPI and about a quarter of the core CPI, their reversal has been a important source disinflation.

Accommodation: Housing is heavily weighted in the CPI, accounting for more than a third of the total index and about 45 percent of the core index. On a half-yearly basis, property inflation peaked at almost 9% in January last year, before reversing. Today's report shows housing costs rose 0.4 percent last month, up from 0.5 percent in January. The chart shows that housing inflation is significantly below its peak, but remains elevated relative to its pre-pandemic average.

It is well known that the US real estate market suffers from a long-term deficit of supply relative to demand. President Biden's 2025 fiscal year budgetreleased yesterday, offers a broad and ambitious list of Strategies to significantly increase housing affordability – for both renters and homeowners – and, more importantly, the stock of affordable housing.

Non-Housing Services (NHS): This next category, also called basic services minus housing, encompasses the rest of the core inflation market basket (its weight is about 26 percent of the headline CPI and about 33 percent of the core inflation). Since services are more labor intensive than the other two core inflation categories we discussed, inflationary pressures in this category are considered more sensitive to wage growth (the CEA examined this relationship in a few detail). As the labor market has cooled, nominal wage growth has slowed, which should help to ease pressures on the most wage-sensitive categories of the NHS (importantly, inflation has fell faster than wage growth, implying an increase in real wages). In contrast, inflation in less wage-sensitive sectors of this category (e.g., medical care services and airfares) has put upward pressure on this subindex in recent months.

Last month, NHS inflation was 0.5 per cent, up from 0.8 per cent in January. On a half-yearly basis, after falling from 8% in June 2022 to around 3% in August 2023, Figure 3 shows that the series has accelerated and, unlike core goods, is contributing to higher inflation.

As noted, these three categories constitute core inflation. To achieve overall inflation we need to add food and energy. While energy in general and retail gas in particular have recently put downward pressure on the overall index, in February the price of gas contributed 12 basis points to the monthly inflation rate, after have subtracted the monthly inflation over the previous four months.

Food inflation has declined significantly for groceries and to a lesser extent for restaurants. Food inflation was zero last month, compared to 0.4 percent in January. In February 2022 and 2023, the 6-month annualized food inflation was 12.2 and 5.6 percent, respectively. The comparable figure in February 2024 was 1.6 percent. Over the past year, food prices have fallen for pork, chicken, seafood, eggs, milk, coffee and butter.

Figure 4 brings together all of these categories, showing the contribution of each to the 6-month annualized growth rate. The chart shows that food, goods and energy prices have contributed significantly to disinflation, while housing and NHS inflation have yet to contribute consistently.

The CEA will continue to be under fire from inflation reports as the Biden-Harris administration continues its work to reduce costs on behalf of American consumers.

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