CPI Inflation Slows to 3.4% in July as Shelter and Airfares Rise

After a month in which falling gasoline pulled the index down by the most in six years, the July Consumer Price Index looked more like a normal report. The all-items index rose 0.1 percent on a seasonally adjusted basis, the Bureau of Labor Statistics reported on Wednesday, following the 0.4 percent decline in June. CPI inflation over the 12 months ended in July was 3.4 percent before seasonal adjustment, a slight easing from 3.5 percent in June.

What changed under the surface matters more than the single decimal. Energy kept falling, but the core index, which leaves out food and energy, moved up 0.2 percent after being unchanged in June. Medical care, airfares and communication picked up, and shelter, though soft again, supplied roughly two-thirds of the monthly increase in the headline index.

The July CPI inflation breakdown

Energy was the main drag. The index fell 1.5 percent in July after a 5.7 percent decline in June. Gasoline decreased 2.9 percent on a seasonally adjusted basis; before seasonal adjustment the fall was 2.1 percent. Natural gas rose 0.7 percent and electricity 0.1 percent. Over the year, energy remains up 14.7 percent, with gasoline up 24.6 percent, electricity 4.2 percent and natural gas 4.3 percent.

Food rose 0.1 percent for the month. Food at home slipped 0.1 percent, with three of the six major grocery groups declining. Meats, poultry, fish and eggs fell 0.7 percent, helped by a 1.5 percent drop in pork, and the fruits and vegetables index fell 0.1 percent as lettuce prices dropped 16.4 percent. Nonalcoholic beverages moved the other way, rising 0.9 percent after a 1.5 percent decline in June. Restaurant and takeout prices rose 0.3 percent, with limited service meals up 0.4 percent and full service meals up 0.2 percent. Over 12 months, food is up 3.0 percent, food at home 2.7 percent and food away from home 3.4 percent.

The seasonally adjusted path of the all-items index this year has been a rise of 0.2 percent in January, 0.3 percent in February, 0.9 percent in March, 0.6 percent in April and 0.5 percent in May, then the June decline and the July gain. The index level, on the 1982-84 base, was 333.918 in July, and before seasonal adjustment it was unchanged from June.

Core inflation firms up

The all items less food and energy index rose 0.2 percent after no change in June. Its 12-month change was 2.5 percent, down from 2.6 percent. That is the lowest annual rate among the headline measures in the release, and well below the 3.4 percent all-items figure, which still carries the weight of last spring’s energy surge.

Medical care did much of the work, rising 0.4 percent after a 0.1 percent decline in June. Hospital services increased 0.5 percent and physicians’ services 0.2 percent, while prescription drugs fell 0.8 percent. Airline fares rose 2.2 percent after a 0.2 percent gain in June, and they are 25.5 percent higher than a year ago. Communication rose 0.6 percent, education 0.5 percent, recreation 0.2 percent and used cars and trucks 0.4 percent. New vehicles, household furnishings and operations, and apparel also moved higher.

The offsets were few. Motor vehicle insurance decreased 0.3 percent, which is small after declines of 2.0 percent in June and 1.7 percent in May. Personal care was unchanged.

Shelter: soft, but still the largest contributor

Shelter rose 0.1 percent in July, as it did in June. Because shelter carries the largest weight in the CPI, even a small increase in it contributes a lot to the total, and the BLS said it accounted for roughly two-thirds of the all-items increase.

The components were uneven. Owners’ equivalent rent rose 0.3 percent, as did rent. That is a firmer reading than the 0.2 percent and 0.1 percent of June. The drag came from lodging away from home, which fell 2.8 percent after a 2.3 percent decline the month before. Without hotels and similar stays, the housing measures would have looked firmer. Over the year, shelter is up 3.2 percent, down from 3.3 percent in June.

That distinction is useful because the two components behave differently. Rent and owners’ equivalent rent move with leases and housing demand and change slowly. Lodging prices swing with travel patterns and can reverse quickly. A reader looking for the underlying trend in housing costs would put more weight on the former, which in July suggest steady, moderate pressure.

Goods, services and the 12-month picture

Goods and services told different stories. Commodities less food and energy commodities rose 0.2 percent for the month, after small declines in the previous two, and are up 0.8 percent over the year. New vehicles rose 0.1 percent and are up 0.5 percent on the year; used cars are down 1.9 percent. Services less energy services rose 0.2 percent for the month and 3.0 percent over 12 months, down from 3.2 percent. Transportation services rose 0.3 percent in July, while medical care services increased 0.6 percent and are up 2.7 percent over the year.

Apparel is still 3.9 percent higher than a year ago, and medical care commodities are down 2.7 percent. The CPI for Urban Wage Earners and Clerical Workers rose 3.4 percent over 12 months.

What the report means

Three conclusions follow from the figures. First, the energy shock that dominated the spring has stopped adding to inflation; energy is now subtracting, though the annual comparison remains high at 14.7 percent. Second, core inflation has resumed a modest pace after the pause in June, and the 12-month rate of 2.5 percent is moving in the direction households would want. Third, the pieces of the index that have the biggest swings this summer are the ones that depend on fuel and travel: gasoline, airfares and lodging.

The picture is not one of broad cooling. Medical care and airfares rose sharply in the month, and shelter is above 3 percent annually. A cleaner view of the trend will need another month or two of data. The next PPI report will show whether producer-level costs are still easing, and the next CPI report will show whether the July gain in core was a rebound from June’s zero or the new run rate.