Fed’s Nightmare: CPI Inflation in Core Services Worst in 6 Months, Pushing Core CPI to Worst in 6 Months. Some Goods Prices Fell, Others Rose
Wolf Richter

The shocker for the 2nd month was the re-acceleration of inflation in core services, the biggie, accounting for 60% of overall CPI.

Core services move the needle. They include housing costs, medical care, health insurance, auto insurance, tenant’s insurance, subscriptions; telephone, internet, and wireless services; lodging, rental cars, airline fares, education, movies, sports events, club memberships, water, sewer, trash collection, motor vehicle maintenance and repair, etc. And that’s where inflation re-accelerated sharply for the second month in a row.

Core services accelerated to 4.5% annualized in July from June (+0.36% not annualized), the worst in six months, and the second month in a row of sharp increases, and it wasn’t housing costs that did it (blue in the chart).

The three-month core services CPI accelerated to 3.2%, also the second month in a row of acceleration (red).

While everyone was busy searching with their magnifying glasses for signs that tariffs are getting pushed into consumer goods prices – there was a mix of price increases and price declines – it was in services where inflation took off again behind their backs, and services are the biggie.

Year-over-year, core services accelerated to 3.65%, the second month in a row of acceleration.

In terms of goods, many of which are tariffed: New vehicle prices remained unchanged after declining for three months in a row. Prices of used vehicles, which are not imported and therefore not tariffed, continued to rise which they’ve been doing for a year. They’re big contributor to durable goods inflation. Apparel, footwear, and jewelry remained unchanged for the month and were down year-over-year. Household furnishings and supplies rose 0.7% for the month and by 2.4% year-over-year. Consumer electronics fell 1.4% for the month and by 5.9% year-over-year.

Food price dipped month-to-month, and gasoline prices fell.

Durable goods prices rose by 0.36% (+4.5% annualized) in July from June, after remaining essentially unchanged in June and falling in May. Year-over-year, the CPI for durable goods rose by 1.2%.

The surge in used vehicle prices has been a big contributor to the price increases of durable goods.

The durable goods CPI had spiked by 25% during the free-money era. Then in mid-2022, prices declined for two years through August 2024 (negative CPI). But from September on, prices began to inch up again.

This chart of the price index, not the percentage change, clarifies just how violently prices spiked during the free-money era, how they declined for two years, and how they’ve inched higher from the low point last August.

New vehicles CPI was unchanged in July from June, seasonally adjusted, and year-over-year was nearly unchanged (+0.4%).

The price level remains below where it had been in all of 2023 and in the first part of 2024.

The spike during the free-money era, which resulted in massive historic profits for automakers and dealers, drove prices to the economic limit beyond which higher prices kill demand, and prices cannot be raised without sacrificing sales, and automakers know it, and disclosed in their earnings warnings that they’re eating the tariffs. Meanwhile, they’ve started to work on shifting more production of vehicles and components to the US to mitigate the impact of tariffs – which is what tariffs are supposed to accomplish.

GM, which makes a large portion of its US-sold vehicles in Mexico, China, South Korea, and Canada, and moved much of its supply chains overseas, is among the hardest-hit. Tesla and Honda, whose vehicles are among those with the most US content, are among the least hit.

Used vehicle CPI has been rising since mid-2024, after the long drop from the historic spike.

In July, prices rose by 0.48% from June (+5.9% annualized), seasonally adjusted, after four months in a row of declines.

Not seasonally adjusted, the used vehicle CPI has increased steadily since mid-2024 (blue line).

Year-over-year, used vehicle prices rose by 4.8%, the seventh month in a row of year-over-year increases, and the biggest one yet.

Apparel and footwear are largely imported and tariffed. The CPI for apparel and footwear inched up a hair by 0.07% month-to-month and was down 0.2% year-over-year.

The chart shows the price level (not the percentage change).

So far, companies have eaten the tariffs because prices are already high after the spike in 2020-2022, when consumers were willing to pay whatever, and retailers made record huge profits. But now the free money is gone, and consumers are ticked off about high prices and are not willing to pay whatever again. In this environment, if retailers raise prices, they lose sales.

“Core” CPI, which excludes food and energy components to track underlying inflation, accelerated to +0.32% in July from June (+3.9% annualized), the worst in six months.

The driver was the core services CPI, which totally dominates the core CPI. Durable goods prices, which had been pushing down core CPI in the prior months, increased in July, instead of pushing down core CPI, and that made matters worse.

The 3-month “core” CPI accelerated to +2.8% annualized, the worst since March (red).

The overall CPI, which includes food and energy, rose by 0.20% (+2.4% annualized) in July from June.

Drivers behind this deceleration were the sharp month-to-month drop in energy prices and the drop in food prices.

The 3-month CPI rose by 2.3% annualized, a slight deceleration from June.

Year-over-year price changes:

• Overall CPI: +2.7% (gold), same as in the prior month, and both were the worst since February.
• Core CPI +3.1% (red), the third acceleration in a row and the worst since February.
• Core Services CPI: +3.65% (blue), the second acceleration in a row and the worst since March.

Housing components of core services

Owners’ Equivalent of Rent CPI decelerated to +0.28% (+3.4% annualized) in July from June.

The three-month average decelerated to +3.5% annualized.

OER indirectly reflects the expenses of homeownership: homeowners’ insurance, HOA fees, property taxes, and maintenance. It’s the only measure for those expenses in the CPI. It is based on what a large group of homeowners estimates their home would rent for, with the assumption that a homeowner would want to recoup their cost increases by raising the rent.

As a stand-in for homeowners’ expenses, OER accounts for 26.2% of overall CPI and estimates inflation of shelter as a service for homeowners.

Rent of Primary Residence CPI accelerated a hair to +0.26% (+3.1% annualized) in July from June, the second acceleration in a row.

The 3-month rate continued to decelerate, to +2.8% annualized, the lowest since mid-2021.

Rents are no longer the driver of services inflation; the drivers of services inflation are now in other services.

Rent CPI accounts for 7.5% of overall CPI. It is based on rents that tenants actually paid, not on asking rents of advertised vacant units for rent. The survey follows the same large group of rental houses and apartments over time and tracks the rents that the current tenants, who come and go, pay in rent for these units.

Year-over-year, OER rose by 4.1%, continuing the deceleration, but still substantially higher than before the pandemic (red in the chart below).

Rent CPI (blue in the chart below) rose by 3.5%, continuing the deceleration. It is now back in the range that prevailed before the pandemic.

The table below shows the major categories of “core services,” and include food services. Combined, they accounted for 64% of total CPI:

Food Inflation

The CPI for “Food at home” dipped a hair (-0.1%) in July from June (-1.4% annualized), but rose 2.2% year-over-year.

Since January 2020, food prices have surged by 27%.

Beef has been a culprit for years and has become extremely expensive as US cattle herds have dropped for a slew of reasons to a 64-year low.

Overall beef prices spiked by 1.5% in July from June and by 11.3% year-over-year.

For example, the average price of a pound of ground beef spiked by 2.2% month-over-month (+29% annualized) and by 13.8% year-over-year, to $6.25.

Since January 2020, the average price of ground beef has spiked by 61%. This is a years-long issue:

Coffee spiked by 2.3% for the month and by 14.5% year-over-year. Since mid-2021, when this price surge began, the CPI for coffee surged 41% following global commodity coffee prices:

But egg prices continued to plunge for the fourth month in a row, as they unwind their avian-flu-driven price spike.

For example, the average price of a dozen Grade A large eggs dropped another 3.9% in July from June, to $3.60, bringing the four-month plunge to 42%.

But they’d spiked so much during the avian flu period through March that even after this four-month plunge, they’re still up 16.4% year-over-year and by 146% from January 2020:

Energy

The CPI for gasoline fell by 2.2% in July from June, seasonally adjusted, to the lowest level since mid-2021.

Year-over-year, the gasoline index fell by 9.5%. Lower oil prices are the driver. Gasoline makes up about half of the overall energy CPI.

The CPI for energy overall fell by 1.1% month-to-month and by 1.6% year-over-year.

Despite the ups and downs, the index has essentially been flat for two years, but at much higher levels than before the pandemic.

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Founder, Wolf Street Corp, publisher of WOLF STREET.

In his cynical, tongue-in-cheek manner, he muses on WOLF STREET about economic, business, and financial issues, Wall Street shenanigans, complex entanglements, and other things, debacles, and opportunities that catch his eye in the US, Europe, Japan, and occasionally China.

Wolf lives in San Francisco. He has over twenty years of C-level operations experience, including turnarounds and a VC-funded startup. He has a BA, MA, and MBA (UT at Austin).

In his prior life, he worked in Texas and Oklahoma, including a decade as General Manager and COO of a large Ford dealership and its subsidiaries. But one day, he quit and went to France for seven weeks to open himself up to new possibilities, which degenerated into a life-altering three-year journey across 100 countries on all continents, much of it overland, that almost swallowed him up.

 

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