Higher Prices, Less Aid

The Consumer Price Index (CPI) rose 0.4% in August after jumping 0.6% in July. The CPI increased 1.3% from a year ago, a sharp rebound in prices from the trough of 0.1% in April. Prices at the gas pump increased slightly in August but have since receded. Food prices were close to unchanged compared to July but still well above levels a year ago.

The core CPI (excluding food and energy) rose 0.4% from July and an even steeper 1.7% from a year ago. A sharp 5.4% jump in used car prices accounted for much of that increase but gains were broad-based. Some cost pressures should abate as we move into the fall.

Prices actually fell in August for proteins including meats, poultry, fish and dairy products; we saw higher costs earlier in the year with bottlenecks due to infections at meat and poultry processing plants and the drop-off in demand from shuttered restaurants.

The overall rise in prices at the grocery store has been particularly hard on the unemployed whose insurance benefits were cut in August. Measures of food insecurity are rising along with evictions. Congress is still gridlocked on passing a new aid package. After returning from recess on Tuesday, members left on Thursday for another long weekend.

Details in the breakdown of data show the clear imprint of the COVID-19 crisis. Those who can are spending more to upgrade their homes, yards and work spaces; that’s pushing up costs in those areas. They are also spending more on home exercise equipment, music recordings and subscription services to make those workouts easier. Prices for window and floor coverings posted big increases along with furniture and dishes. (I have found that I break a lot more dishes and glasses when I am using them so much more.)

Shelter costs were nearly flat but the costs of managing the waste we are generating jumped. The downside to eating at home and ordering goods online is the amount of garbage and packaging we generate.

Medical costs slowed after surging earlier in the crisis. Many physician and dental offices added extra fees to cover the cost of PPE when they reopened. Many medical offices have had a hard time luring parents back to work, which has also increased costs along with the social distancing of patients.

Bottom Line
Inflation has picked up quickly with the reopening of the economy. Some of that can be attributed to temporary supply shocks that should play out as we move into the fall. Energy prices have fallen in recent weeks. The Federal Reserve is betting that the blow to incomes tied to COVID will ultimately trigger more disinflation than inflation. I tend to agree, given that the distortions in the breakdown of the data seem to reflect the spending behavior of those who are least affected by COVID-related employment losses.

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