Update 818 — CPI Down Six Straight Months;
Inflation Falls to 2.4%, Lowest Since Feb. 2021
Yesterday’s CPI report for September showed prices across the board dropping marginally to 2.4 percent, year-on-year, from 2.5 percent in August. Although the new rate — the lowest since early 2021 — came in slightly above expectations, the modest decline should keep the Fed on track to cut rates despite last week’s blowout employment figures for September, when the economy added 254,000 jobs.
Consumer prices have generally trended downward for 18 months and each month for the last six months. The long decline in this politically preeminent metric has helped Kamala Harris narrow the polling advantage Donald Trump has had on economic policy by roughly half in the 10 weeks since President Biden dropped out of the presidential race. This story and the other major economic policy developments of the week are covered below.
Good weekends, all…
Best,
Dana
Headline
Inflation as Measured by CPI Falls to 2.4% in September
Inflation as measured by the Consumer Price Index (CPI) fell to 2.4 percent on an annualized basis last month, the smallest 12-month increase since February 2021, signaling that inflation continues to move toward the Federal Reserve’s two percent target. This is according to the September CPI report released by the Bureau of Labor Statistics yesterday morning.
Consumer prices rose by 0.2 percent on a monthly basis, on par with the two months prior. Headline CPI fell on a year-on-year basis for the sixth consecutive month. Core CPI inflation – which excludes food and energy prices which can vary broadly – rose by 3.3 percent on a year-on-year basis in September and by 0.3 percent on a monthly basis, just as it had in August.
Source: Council of Economic Advisers
The shelter index – a measure of the cost of housing – rose by 0.5 percent on a monthly basis in September. Meanwhile, food prices rose by 0.4 percent on a monthly basis last month. Food prices had risen by 0.0 to 0.2 percent during each of the six months prior to that. Energy prices fell by 1.8 percent on a monthly basis last month. Contributing to this was the 6.0 percent decrease in fuel oil prices and a 4.1 percent decrease in gasoline prices.
Inflation as measured by CPI has fallen significantly from its peak of 9.0 percent in June of 2022 as it continues to fall toward the Federal Reserve’s two percent goal. With inflation making significant progress, last month the Fed’s interest-rate-setting committee, the Federal Open Market Committee (FOMC), cut interest rates from the elevated 5.25 to 5.5 percent level to the 4.75 to 5.0 percent range.
The rate cut – which has begun lowering the cost for borrowers – combined with further progress on inflation, is likely to boost consumer confidence and voter confidence in the economy ahead of the election, although grocery prices rose more notably on a monthly basis in September than during each of the six months prior. Inflation has continued to be a major issue for voters as we approach the November election when voters will face a choice between Trump, whose proposed economic policies – including mass deportation and steeper tariffs – could increase inflation by as much as 1.2 percent in 2025 according to Goldman Sachs, and Harris who has focused major aspects of her economic agenda on lowering costs of housing and groceries for American families.
September inflation data and the October jobs report will give the FOMC a clearer picture of labor market conditions and the rate path forward ahead of its next meeting on November 6 and 7, the two days immediately following the general election.
Other Developments
Trump Proposes Tax Cut for Car Loan Interest in Detroit
On Thursday, Trump unveiled another feature of his fiscal plan in a speech to the Detroit Economic Club. In what was clearly an attempt to appeal to swing state voters in Michigan – the main hub of the U.S. auto industry – Trump announced plans to make interest payments on car loan payments fully deductible. This proposal comes following recent polling that shows Trump up by three percent in Michigan, a state that has the potential to decide the presidential election.
While there is no official cost estimate or further details on Trump’s newest plan, Roll Call noted that a similar proposal by former Senator Barbara Mikulski (D-MD) was projected to cost $8.5 billion from 2008 to 2009.
Full deductibility for interest on car loan payments now joins other Trump proposals to reform the tax treatment of:
- Tip income
- Social Security income
- Overtime pay
- U.S. citizens living abroad
These proposals are likely an attempt to counter the narrative that Trump will prioritize cutting taxes for the wealthy and corporations, though his proposals have been scrutinized as being more beneficial for messaging than they would be as actual policies. In any case, it is safe to assume these proposals are nothing more than lip service given Trump’s extensive track record of putting wealthy individuals and corporations over all else, including working- and middle-class Americans and the fiscal health of the country itself.
Furthermore, Trump’s affinity for new tax proposals has not been paired with an equal focus on offsetting their cost. Trump heavily relies on vague tariff proposals to justify his costly plans, though economists are skeptical tariffs would bring in as significant amount of revenue as Trump asserts. Even in the remote case they could pay for Trump’s tax cuts, the tariffs would drive higher prices for everyday consumers.
According to an analysis of Trump’s latest proposal by the Center for a Responsible Federal Budget (CRFB) that proceeded Trump’s latest proposal, Trump’s fiscal plan would add $7.5 trillion to the national debt over 10 years and Harris’ would add $3.5 trillion over 10 years.
Hurricanes’ Toll on Federal Disaster Program Resources
Hurricane Milton devastated the western coast and parts of central Florida this week. At the time of writing, the true extent of the damage is unknown, but it has been confirmed that the western Florida counties of Hillsborough, Pinellas, and Sarasota were hit particularly hard, with at least twelve people confirmed dead, hundreds of homes destroyed, and over three million people left without power.
The good news is that the storm surge was short of the worst-case scenario many feared would hit Tampa. Before the storm, Wall Street analysts estimated that Hurricane Milton could cause damage of more than $50 billion, potentially rising as high as $175 billion in a worst-case scenario. Milton, following on short order the vastly greater damage wrought last week by Hurricane Helene, compounds the problem facing many of the most important federal programs for addressing natural disasters, which are running low on funds:
- FEMA: Thanks in part to Hurricane Helene, FEMA’s Disaster Relief Fund had already spent $9 billion of its $20 billion annual budget before Hurricane Milton even made landfall. If those funds run out, FEMA will be forced to focus on life-saving operations at the expense of rebuilding operations essential for bringing disaster-hit areas back to normal as quickly as possible.
- FEMA’s flood insurance program: The program which is once again low on funds, has nearly 2 million policies in the areas hit by Helene and Milton and could be forced to borrow from federal taxpayers if it no longer has the money to pay out for claims.
- SBA: The Small Business Association (SBA), which usually provides homeowners and businesses with low-interest loans for repairs and rebuilding, was dangerously low on funds before Hurricane Milton hit and likely will not have enough money to make it through to the end of the month.
The absence of SBA loans is likely to accelerate the drain of FEMA disaster funds by forcing people who could have gotten loans to sign up for FEMA emergency aid of up to $42,000. Congress has the power to provide these and other federal programs with the money they need to address the damage caused by the hurricanes but they are on recess until after the election. Speaker Mike Johnson has the power to reconvene Congress, but as recently as Sunday has refused to do so.
Meanwhile this week, Donald Trump’s campaign of misinformation continued, with implications that FEMA assistance to those whose homes were destroyed is capped at $750 and that FEMA housing of unauthorized migrants has resulted in a shortfall for disaster relief efforts. FEMA does indeed help administer a program assisting with migrant housing, but this is derived from a separate funding stream than disaster relief, which even Speaker Mike Johnson has acknowledged. FEMA Administrator Deanne Criswell has suggested that false information could hamper recovery efforts or dissuade people from seeking aid to which they are entitled.
CBO Reports $1.8 Trillion Deficit for FY24
This week, the Congressional Budget Office (CBO) released its final budget report for Fiscal Year 2024 (FY24), which ended on September 30.
According to the CBO analysis, the federal budget deficit was $1.8 trillion in FY24, an increase of $139 billion compared to FY23. Though this is smaller than the close to $2 billion deficit for FY24 that the CBO projected in June, it raises significant concerns about the rising national debt which surpassed $35 trillion earlier this year.
While revenues rose by $479 billion (11 percent), the CBO notes that the increase was mostly due to delayed filing deadlines that pushed the receipt of revenue from past tax years into FY24. The “real” change may have been less than a percentage point. In any case, the increase in revenue was not enough to keep pace with increased outlays, which rose by $617 billion (10 percent), and interest expenses, which rose by $240 billion (33 percent).
These data points come in the middle of a highly-contested presidential race in which both candidates have put forth extensive fiscal policy proposals that could add trillions of dollars to the national debt if not offset. Vice President Harris’ plan could cost $3.5 trillion/10 years, but this is less than half of the cost of Trump’s plan, which could be as high as $7.5 trillion/10 years according to the Center for a Responsible Federal Budget (CRFB).
The U.S. Department of Treasury is expected to issue a more comprehensive report on the FY24 deficit later this month.
IRS/Treasury Outline Expansion of Direct File for 2025
The Internal Revenue Service (IRS) and the U.S. Department of Treasury rolled out a pilot for Direct File – a free program that allowed taxpayers with simple returns to file their taxes directly with the IRS – during the 2024 filing season. Taxpayers in the 12 states included in the pilot gave Direct File great reviews, with 90 percent of users rating their experience positively and 86 percent saying it increased their trust in the IRS. The program was designated as a permanent option earlier this year following positive reviews, with information about its expansion to come at a later date.
Last week, the Treasury Department and IRS announced the final guidance on the program’s expansion for the next filing year, declaring that Direct File will be available to 30 million Americans across 24 states (new states that did not participate in last year’s pilot are starred):
- Alaska*, Arizona, California, Connecticut*, Florida, Idaho*, Kansas*, Maine*, Maryland*, Massachusetts, Nevada, New Hampshire, New Jersey*, New Mexico*, New York, North Carolina*, Oregon*, Pennsylvania*, South Dakota, Tennessee, Texas, Washington, Wisconsin*, and Wyoming.
Along with doubling the number of states participating in Direct File next year, the IRS has expanded eligibility for additional tax situations (new situations not included in this year’s pilot are starred):
Types of income
- Wage income (W-2)
- Social Security income (SSA-1099)
- Unemployment compensation (1099-G)
- Interest income (1099-INT)*
- Pension and annuity income excluding IRAs (1099-R)*
- Alaska Permanent Fund Dividends for Alaska residents (1099-MISC)*
Types of Credits
- Earned Income Tax Credit
- Child Tax Credit
- Credit for Other Dependents*
- Child and Dependent Care Credit*
- Premium Tax Credit*
- Retirement Savings Contributions Credit (Saver’s Credit)*
- Credit for the Elderly and Disabled*
Types of Deductions
- Standard deduction
- Student loan interest
- Educator expenses
- Health Savings Account contributions*
Additionally, the Direct File tool will be available to eligible taxpayers starting at the beginning of the filing season. This differs from the extremely slow rollout of the tool last year, which was not opened to all eligible taxpayers until around a month before the April 15 filing deadline.
While the decision to expand Direct File will allow many more taxpayers to use the tool to file their 2024 returns, gig workers, Americans living abroad, and filers who have lived in multiple states during the tax year remain ineligible for Direct File, among other tax situations.
Though this is likely to be the final scope of Direct File for the 2024 tax year, Treasury stated that they have received commitments from additional states for the 2025 tax year (2026 filing year). In addition to adding states, Treasury and the IRS will surely consider expanding the scope of Direct File to cover more tax situations, which was not possible this year in some cases due to administrative and technological feasibility.
USDA Announces New Pro-Competition Actions
On Tuesday, the United States Department of Agriculture (USDA) announced multiple steps to promote competitive markets for American farmers and ranchers and lower prices. The USDA announced three actions:
- The USDA will leverage its funding, research capacity, and interagency partnerships to promote competition in the highly consolidated seed market by increasing transparency and improving researcher access to seed germplasm.
- The department released the “Interim Competition and Fair Practices in Meat Merchandising” report. The report identifies potential problematic fees and unjust or anticompetitive pricing strategies present in the beef market based on over 1,600 comments the agency has received from the public.
- It issued the “Price Discovery and Competition in Markets for Fed Cattle ANPR.” The ANPR (advanced notice of proposed rulemaking) presents a series of potential regulatory interventions to improve price discovery and fair and competitive trading environments in fed cattle markets and requests comment on their potential efficacy.
America’s food systems continue to be deeply consolidated. Four beef packers control 85 percent of the market. Three companies control nearly two-thirds of the world’s commodity crop seeds. These actions are an important step in addressing this extreme consolidation.