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Gas Prices Drive Inflation Higher

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The Consumer Price Index (CPI) rose 0.6% in July, matching the jump in June. A third of the rise in the CPI can be attributed to a second month of price increases at the gas pump. Food prices finally receded a bit after surging in late spring and early summer. All of the drop in food prices occurred at grocery stores instead of in restaurants.

The drop in the cost of food at home was broad-based. The largest decline was in the price of meat, which fell as meat processing plants came back on line. A surge in COVID-19 infections had shuttered meat and poultry processing plants in recent months. Beef prices remained more than 14% above July last year’s level.

Overall, food prices at grocery stores remain well above (4.6%) year-ago levels, which is adding extra pressure for the millions of workers on unemployment insurance. The pandemic-related, extra $600 per week lapsed at the start of August; that translates into $18 billion per week less for households to spend, mostly on food and shelter.

Core CPI, which strips out changes in food and energy prices, also rose 0.6% during the month. Medical care services and used car prices led the gains. Medical care costs are now running nearly 6% ahead of year-ago levels, which makes it harder on retirees who spend more on medical bills than the rest of the population. Used car prices rose after several months of decline. Demand has picked up for used cars in recent months as people look for alternatives to mass transit. We have also seen a pickup in the supply of cars for sale coming from the rental car market, which crashed in the wake of COVID-19. Business travel remains especially weak.

Overall CPI rose only 1% from a year ago, reflecting weakness during the height of lockdowns. The core CPI was a bit warmer, rising 1.6% from a year ago.

The challenge going forward is the blow to demand triggered by the lapse in unemployment benefits. Five independent studies now show that the supplemental $600 was not the deterrent to working that many feared, but did provide a lot of support for consumer spending. Now that it is gone, consumer spending and the reacceleration we were seeing in prices could evaporate. A second wave of infections in the fall is another threat given the return of students to college campuses and the outsized role they played in spreading the virus during the summer.

Bottom Line
Overall inflation remains tepid and is likely to decelerate in the months to come, but for the wrong reason: a slowdown in the recovery. The tens of millions who relied on unemployment benefits will suffer a serious blow. Expect food insecurity to rise along with homelessness.

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