The Consumer Price Index (CPI) surged 0.6% in June, the fastest monthly pace of inflation since August 2012. The CPI was up only 0.6% from a year ago, which is still weak. The problem is the composition of inflation. Basics like food and energy surged along with medical costs during the month, while the costs of hotel accommodation continued to plummet. Airfares firmed after plummeting during the height of lockdowns. Those increases will not hold, given the surge in COVID-19 infections. Many other countries, states and at least one major city - Chicago - have tightened travel restrictions from hot spots. Vacation expenses were cheaper if you could find a place to drive to and not eat along the way.
The jump in food prices is particularly worrisome as it has been persistent and is crimping the budgets of people trying to make ends meet; it could have been avoided. Much of the surge in the prices of meat and poultry can be traced to a surge in COVID-19 cases and plant closures. Meat prices alone have jumped more than 20% over the last three months as ranchers fret they can’t get their livestock to market. The bottlenecks are hitting both grocers and restaurants. Farmers were also forced to let crops rot in the fields as restaurants closed. The only food category to post a decline in prices in June was dairy products. That was the first decline in almost a year.
Millions have lost their jobs or suffered a cut in their wages, which has forced many to turn to food banks for help. Now Congress looks poised to let expansions to unemployment insurance lapse at the end of July. Some people are still waiting on their checks. The lines at food banks will no doubt get longer before they get shorter this summer.
Energy prices were not as bad; increases in June followed a sharp drop in prices earlier this year. Prices at the gas pump are still down more than 20% from a year ago, which is the only silver lining. OPEC is also expected to loosen curbs on production at its next meeting in an effort to boost revenues. Increasing production will bring down energy prices further on a year-over-year basis. That doesn’t help much if you are working from home or don’t have a job to drive to.
The CPI excluding food and energy rose 0.2%, which marked the first increase in four months. The core CPI held at 1.2% in June on a
ear-over-year basis, the same as in May. That was well below the Federal Reserve’s target of 2%. Technically, the risks of deflation are picking up, but who cares when one can’t afford to feed a family. The Federal Reserve can’t do much to influence food prices but Congress could, by authorizing subsidies to farmers and protocols on how to make meat and poultry processing more safe.
Overall inflation remains relatively low, but the fact is that lots of families are struggling to put food on the table. The costs at the grocery store are rising at a staggering pace, while unemployment remains extremely high. Elected officials could do something, but Congress is still in recess. This is the hardest reality I have ever had to explain during my career as an economist.
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