The shocker for the 2nd month was the re-acceleration of inflation in core services, the biggie, accounting for 60% of overall CPI.
By Wolf Richter for WOLF STREET.
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 or 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.
| Major durable goods categories | MoM | YoY |
| Durable goods overall | 0.4% | 1.2% |
| New vehicles | 0.0% | 0.4% |
| Used vehicles | 0.5% | 4.8% |
| Household furnishings (furniture, appliances, floor coverings, tools) | 0.7% | 2.4% |
| Sporting goods (bicycles, equipment, etc.) | 0.4% | -1.3% |
| Information technology (computers, smartphones, etc.) | -1.4% | -5.9% |
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:
| Major Services ex. Energy Services | MoM | YoY |
| Core Services | 0.4% | 3.6% |
| Owner’s equivalent of rent | 0.3% | 4.1% |
| Rent of primary residence | 0.3% | 3.5% |
| Medical care services & insurance | 0.8% | 4.3% |
| Food services (food away from home) | 0.3% | 3.9% |
| Motor vehicle insurance | 0.1% | 5.3% |
| Education (tuition, childcare, school fees) | 0.4% | 3.5% |
| Admission, movies, concerts, sports events, club memberships | 0.7% | 4.4% |
| Other personal services (dry-cleaning, haircuts, legal services…) | 0.5% | 4.5% |
| Public transportation (airline fares, etc.) | 3.0% | 0.7% |
| Telephone & wireless services | -0.1% | -0.5% |
| Lodging away from home, incl Hotels, motels | -1.3% | -4.8% |
| Water, sewer, trash collection services | 0.4% | 5.3% |
| Motor vehicle maintenance & repair | 1.0% | 6.5% |
| Internet services | 0.0% | -2.4% |
| Video and audio services, cable, streaming | -0.3% | 2.2% |
| Pet services, including veterinary | 0.4% | 6.0% |
| Tenants’ & Household insurance | 1.0% | 5.8% |
| Car and truck rental | -2.9% | 0.7% |
| Postage & delivery services | 0.4% | 3.1% |
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:
| MoM | YoY | |
| Food at home | -0.1% | 2.2% |
| Cereals, breads, bakery products | -0.2% | 1.0% |
| Beef and veal | 1.5% | 11.3% |
| Pork | 0.5% | 1.1% |
| Poultry | -0.1% | 3.1% |
| Fish and seafood | 0.4% | 1.7% |
| Eggs | -3.9% | 16.4% |
| Dairy and related products | 0.7% | 1.5% |
| Fresh fruits | -1.4% | 1.3% |
| Fresh vegetables | 1.2% | -0.8% |
| Juices and nonalcoholic drinks | -1.3% | 1.5% |
| Coffee, tea, etc. | 1.2% | 8.6% |
| Fats and oils | -1.5% | -1.4% |
| Baby food & formula | 0.9% | -2.3% |
| Alcoholic beverages at home | 0.1% | -0.2% |
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.
| CPI for Energy, by Category | MoM | YoY |
| Overall Energy CPI | -1.1% | -1.6% |
| Gasoline | -2.2% | -9.5% |
| Electricity service | -0.1% | 5.5% |
| Utility natural gas to home | -0.9% | 13.8% |
| Heating oil, propane, kerosene, firewood | 1.0% | -2.1% |
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Great job Herr Wolf …as usual!
Long term bonds responding as expected.
Who is it that keeps harping on the danger of services inflation? And continues to be correct?
Our beloved Mr Wolf.
Why is inflation in services spiking ? Any thoughts ? Pricing power since consumer goods can always be sourced from low cost destinations (with tariffs maybe inflation will show here too but there are alternatives) ?
The cost of doing business, especially the insurance and legal/compliance costs are skyrocketing. That is percolating through everything. At least from personal experience.
Utility natgas to the home nearly +14% yoy, yet Henry Hub can’t even get above $3/mmBTU.
The underlying commodity is deflationary, but the SERVICE to provide it to your home keeps getting more expensive.
Thanks to the Utility Commissioners who give their permission to boost rates because utilities are experiencing the impacts of inflation (wages and their costs for materials), the main product they buy however is seemingly the issue…
I’ve never been a conspiracy theorist, but it’s pretty clear the “asset class” has full hold of MSM in both parties. All of the sudden 4.2% unemployment that’s pacing our increasing dependency ratio, lower immigration is a catastrophe. And inflation is “on target” despite upward trends in the sticky parts over the past 3 years.
Energy kinda saving the day. One time relief though, as Brent can’t really go lower (rig count is already trending down).
I don’t care to debate if current policy is good/bad, but its is inflationary (either transient or permanent): Lower net immigration, large deficits, a weakening dollar (as a import country).
The bond market is acting as it should at least. There are some adults left that aren’t addicted to quick fixes.
Evan,
You don’t have to be a a “theorist” when it’s as plain as the nose on your face. There have been numerous comments here about the massive increases in insurance. The MSM touts “climate change”. I’ve never heard regulatory capture described as climate change but whatever works, right?
“According to AM Best, property casualty insurers made a record $169 billion in profit in
2024—even as they raised prices and pushed for laws to avoid paying more claims, all
while claiming the industry was in trouble.1
The $169 billion profit amounted to a 90% increase from the previous year and a 333%
increase from 2022.”
This. Insurers just whisper climate change to commissioners and all their hikes are approved.
Biggest scam ever!
With slowing population growth (from lower birth rates and lower immigration levels, both legal & illegal), the labor market no longer needs to add as many jobs to hold the unemployment rate steady. Jerome Powell explained this during July’s press conference.
But Wall St sees a NFP report below +100K jobs and screams “WE NEED RATE CUTS!”
Wall Street wakes up and screams WE NEED RATE CUTS before they even get out of bed.
It is really incredible. The entire media apparatus, political left and right, are on board with creating horrible inflation and stealing from savers in order to maintain high asset prices. I’ve never seen anything like it.
Their ability to outright lie (tariffs are showing up in inflation, inflation easing, data supports a September rate cut, etc. etc.) in order to support their position is unmatched.
The last thing the Fed wants is to cut rates and see long-yields go up again. They’ll end up with real egg on their faces if that happens, as I suspect it will.
It’s because both parties are funded by the billionaire and hundred millionaire asset holders, and the crooked politicians are getting rich beyond words themselves.
Why has nobody bothered to ask how “public servants” who entered CONgress with net worths of less than $100k end up multi-millionaires with net worths in the mid to upper 8 digits?
The American people are being taken for a ride, and it’s accelerating.
TSonder305 💯💯💯
Like they say, “I’m not saying it’s true, I’m just ASKING if it may be”
Kinda like “Do you still beat your wife?….just asking”
Anyone else think Wolf may get a shortage of his upper 50% data to play with in his articles soon?….just asking.
Brent is European crude. What you want to look at is WTI, which is currently at approximate parity (5.6x) with Henry Hub natgas on an energy-equivalent basis.
When the price of oil is significantly higher than 5.6x the price of natural gas, then the market is signaling a potential shortage.
Thank You Wolfmeister.
Prost ! 🍻
It was not a great CPI report. Every category went up except for energy, whose 1.1% drop offset all the other categories, yet headline CPI still increased by 0.2%.
TTM Core PCE will likely be around 2.9-3.0%, almost a full percentage point above target, and drifting above the sticky ~2.7% level it’s settled at since May 2024.
Yet the cheerleading financial media spun it as “not as bad as feared,” sending the NASDAQ up another 1% today.
I don’t know how any reasonable central banker who isn’t beholden to politics and/or Wall St can say with a straight face it’s time for more rate cuts.
Greenspan and Shiller are having a press conference at 6:30 am Tomorrow. Watch for the briefcase
Reuters headline, “Stocks rally, oil prices drop after modest US inflation data solidifies Fed rate cut expectations”. Interesting
Just need the “free money from tariffs” to start flowing now and everything will be back to normal
/s
I blow off most of the Trump-said stuff in the headlines. And I’m not taking the tariff rebates stuff seriously either. But if they do come to pass, and free money arrives once again in households across the US, all bets are off in terms of price spikes. Free money is toxic. It turns brains to mush. We went through that in 2020 and 2021.
Lest we ever forget that this massive inflation was STARTED by this admin back in 2020. This guy is a massive money-printer.
Well technically it was to fix the frozen markets.
It’s documented in the book trillionaire dollar triage
Handouts are a classic economist tactic going back to antiquity. It’s on page 23 section b of the playbook.
Its not a conspiracy when its broadcasted in headlines on CNBC
S&P 500 hits new record as CPI report gives Fed green light to cut rates: Live updates
And even better.
Trump threatens Fed chair Powell with ‘major lawsuit,’ demands interest rate cut
Yes, that CNBC headline is another example of the unbelievably delusional ZIRP zeitgeist that continues among various agenda-driven factions and some parts of the media. This group of regular readers here is very thankful for Wolf’s ongoing coverage of this topic, accurately sourcing and aggregating the relevant data, then packaging it in a logical, unbiased presentation. Meanwhile, where is our new generation of bond vigilantes?
And this just in from Reuters: “Investors double down on September Fed cut after CPI.” Really???
It’s interesting to realize how similar phenomenons FDR and Trump are. Both were disrupters.
Both often hold conflicting views and pursue conflicting policies simultaneously.
Both often say one thing while doing another. Both had tremendous power of voice. FDR was the radio president, Trump is the social-media, media as entertainment president.
Both presidents believed they could charm everyone into doing what they wanted. FDR in particular had this absurd notion that Stalin liked him (a kind of pathetic Sally Fields mentality). Trump in a somewhat similar vein thinks he can speak reality into existence by the simple force of his personality.
Out of the chaos both helped create, there emerged some correctives but also the seeds of new disasters.
Maybe it’s really the best we can hope for from “democracies”.
FDR – helped lead the fight against totalitarianism, with particular focus against the Nazis and Japanese.
Trump – Love letters to the leader of North Korea, whose major ally is China. History praising and staying out of the way of Putin, whose main allies are North Korea, China, and Iran.
Yes, clearly no daylight separating Trump and FDR… 😂
So some people decide to go to target to get their kids some school supplies and get wasted in the parking lot…an aggrieved vax patient wants revenge on the CDC, CEO wasted in broad daylight, cutting basic food security for veterans via snap programs, deficits out the eyeballs and debt ridden empire….government is the great teacher to the plebes…empires last about 250 years…the USA got lucky it had 2 oceans protecting it and largest economy by 1900….
Economics is an exact science. It’s just that the Ph.Ds. graduated with a minor in mathematics / statistics, instead of a minor in accounting.
The distributed lag effect of money flows are more or less mathematical constants. Friedman and Schwartz proved this. September should be the peak in the price level, reported in October, a market inflection point.
Wow, there must be a lot of grumpy folks with 15% inflation in coffee… I have a strong addiction to Peet’s beans, which I can only get every few months on account of being outside the country. I’m sure it’s going through the roof now, so will need to find an adequate substitute soon.
Wolf….what likely impact would FR increases in interest rates have on service sectors inflation? Granted, a lotta assumptions built into any answer.
Services inflation is VERY hard to contain once it takes off, which is why the Fed fears it.
Thanks Wolf. Awesome. “The shocker” phase had me chuckling. As, the Fed, politicians, etc, are intentionality & failingly focused on MOM % rate; so they can then apply the wrong policies. Meanwhile, in the real world, consumers, corporations, institutions, charities, focus on “their cost-price vs income, today”. Cost on food, energy, and services are up by ~30%. So the real world will raise wages or prices, if they can, or be forced to make other adjustments. Income inequality graph indicates the income-class reactions and strategies: such as: who is raising wages/prices vs those making adjustments; and also the ‘who and why’ that demands/loves more and more government deficit and debt; or the central bank initiatives. And as taxes are mostly excluded from inflation, its noteworthy that this too is a “price inflation”; and long term, if ~25% of taxpayers pay ~70%/90% of the taxes, we know which groups are headed for de-incoming; fleecing; as they are not covering the combo of inflation plus taxes plus risk rate returns.
IMO: The high level of: greed, incompetence, gas lighting, fiduciary fail, corruption, are extrordinary. What were missing is adults in the room, or legislated political accountability. Salvageable? Too late? IDK
How well is this data understood by the FED? Markets pricing in a 90%+ chance of a rate cut that seems to have no business taking place.
Trump obviously doesn’t understand how the FED works, begging for an interest rate cut so people can “buy homes”, without realizing they don’t control long-term rates, and cutting will likely increase mortgage rates since inflation is hot.
This report was terrible, but the market responds positively. How long can we drink the kool-aid?
What makes you think he doesn’t understand that a fed rate cut would drive long term rates up?
Trump loves having a villain, and right now he’s got that.