The 0.6% m/m surge in core consumer prices in July, which pushed the annual core CPI inflation rate back up to 1.6%, from 1.2%, should end any speculation that the pandemic-related slump in demand will quickly push the economy into a deflationary spiral. But this is not a sign that the US is instead about to experience a bout of much high inflation because of supply restrictions. It mainly reflects a recovery in the prices of goods and services that were most affected during the early stages of the pandemic.
Inflation rebounds as pandemic-related prices recover
- The 0.6% m/m surge in core consumer prices in July, which pushed the annual core CPI inflation rate back up to 1.6%, from 1.2%, should end any speculation that the pandemic-related slump in demand will quickly push the economy into a deflationary spiral. But this is not a sign that the US is instead about to experience a bout of much high inflation because of supply restrictions. It mainly reflects a recovery in the prices of goods and services that were most affected during the early stages of the pandemic.
- Motor vehicle insurance prices increased by 9.3% m/m last month, air fares increased by 5.4%, used vehicle prices rebounded by 2.3%, lodging away from home rates increased by 1.2%, clothing prices increased by 1.1% and new vehicle prices increased by 0.8%. In every case, the price of those goods and services is still lower than it was pre-pandemic. (See Chart 1.) Going in the other direction – food prices, which surged during the pandemic are now falling back – dropping 0.4% m/m in July.
- Looking at the less directly affected categories, rent and owners’ equivalent rent inflation have fallen a little since the pandemic struck, reflecting the surge in unemployment. But medical care services inflation has accelerated, presumably due to added costs.
- The upshot is that, while we are likely to see a rebound in core inflation closer to where it was pre-pandemic – i.e. slightly above 2% – as more of the earlier pandemic-related decline in prices is reversed – there’s no evidence here that prices will rise significantly above pre-pandemic levels.
- Echoing the post-lockdown rebound in prices in other categories, gasoline prices increased by 5.6% m/m in July, more than offsetting that decline in food prices. Headline consumer prices also increased by 0.6% m/m last month, although the annual inflation rate was a more muted 1.0%. Overall, there is nothing here to concern the Fed. Officials will take some small comfort that deflation is not an imminent threat, but interest rates will remain at near-zero for a number of years – even if we are wrong and inflation does begin to rise more significantly.
Chart 1: CPI Inflation (%) |
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Sources: Refinitiv, Capital Economics |
Table: Consumer Prices | ||||||||
All Items | Excl Energy & Food | Energy | Food | Core Goods | Core Services | |||
%m/m | %y/y | %m/m | %y/y | %m/m | %m/m | %m/m | %m/m | |
May | -0.1 | 0.1 | -0.1 | 1.2 | -1.8 | 0.7 | -0.2 | 0.0 |
Jun | 0.6 | 0.6 | 0.2 | 1.2 | 5.1 | 0.6 | 0.2 | 0.3 |
Jul | 0.6 | 1.0 | 0.6 | 1.6 | 2.5 | -0.4 | 0.7 | 0.6 |
Source: BLS | ||||||||
Paul Ashworth, Chief US Economist, paul.ashworth@capitaleconomics.com