Consumer Prices (Jul.) - Capital Economics
US Economics

Consumer Prices (Jul.)

US Data Response
Written by Paul Ashworth
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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 (%)

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