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Food Remains the Outlier in CPI Index

RFP
The Consumer Price Index (CPI) edged down another 0.1% in May after posting the second largest monthly decline on record in April. The drop in prices for nonnecessities spanned the gamut from apparel, motor vehicle insurance (many insurers issued rebates for the decline in driving and risk of accident during lockdown) and airline fares.

Energy prices fell for another month but have since shown signs of firming. OPEC is holding to production cuts while the world attempts to reopen and ramp back up. Shale production in the U.S. was particularly hard hit by the downdraft in energy prices, which was exacerbated by the price war between Saudi Arabia and Russia; removing some shale production from the equation was one of their goals.

The outliers were food and shelter, which were the most important aspects of consumer spending in May. Food prices at home jumped another 1.0% in May and nearly 5% from a year ago. Gains were across the board but largest in dairy products and meats. A sharp increase in COVID -19 outbreaks at meat and poultry processing plants has constrained the supply of meats. Farmers have also been forced to literally dump unused milk and let crops rot on the vine when their main customers, restaurants, were shut down.

We have seen a sharp slowdown in trade in response to COVID, which is exacerbating the pain for the hardest hit households. Food banks continue to report record traffic as food insecurity remains a problem for a large number of households. Families with children under the age of 18 have been harder hit by layoffs tied to COVID and are still struggling despite stimulus checks and enhancement to unemployment benefits.

Food away from home also showed price gains as restaurants struggled to deal with escalating food costs and the difficulty of clearing a profit with limited pick-up and takeaway options. They will be hit again as social distancing measures prevent them from filling their spaces with enough customers to cover overhead, let alone the cost of waitstaff. The cost of food away from home rose 2.9% from a year ago in May. The largest increases showed up in limited-service meals, which increased 3.6% from a year ago.

Shelter costs continued to rise, albeit at a slower pace than we saw pre-COVID. A sharp decline in the cost of lodging away from home, including motels and hotels (down 17.3% from a year ago), only partially offset ongoing increases in rent and homeowners’ equivalent rent cost. Some households skipped rent payments in April and were able to catch up with the arrival of long delayed unemployment benefits. Rent payments for commercial real estate were hit even harder.

The overall CPI edged up a negligible 0.1% from a year ago but it is too soon to declare deflation a major threat, given the skew toward price increases for the basic necessities of food and shelter. The core CPI, which strips out the more volatile food and energy components, rose 1.2% from a year ago.

Bottom Line
The CPI represents a fixed basket of goods, not how consumers actually spend their money. The pandemic and lockdowns that followed put a premium on the cost of the necessities that matter most to households - food and shelter. That makes it a poor gauge of the actual inflation experienced by most households at this time. The near-term effects of COVID will be deflationary. Our concern is that we risk a large supply shock when some firms shut for good; that could trigger stagflation in 2021.

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Karen Nye
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Karen.Nye@us.gt.com

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