Gas Prices Drive Inflation

The Consumer Price Index (CPI) jumped 0.4% in December, largely on a sharp increase in energy prices. Gasoline prices jumped 8.4% during the month but remain down more than 15% from a year ago. Food prices were mixed as food at grocery stores outpaced gains at restaurants. Food prices are still up nearly 4% from a year ago, which is one of many reasons that food pantries have been overwhelmed in recent months. The hope is that the recent federal aid package, coupled with the additional aid likely to come now that Democrats have won a slim majority in the Senate, will alleviate those pressures. Layoffs associated with COVID picked up in December.

The core CPI, which strips out the volatile food and energy components, rose a much more benign 0.1% in December. The largest decline was in airline fares, which fell 2.3% during the month alone and are now down more than 18% from a year ago. Rates for hotel rooms and temporary vacation homes flatlined during the month, despite a rise in holiday travel. They are down more than 11% from a year ago. Used car prices also receded but remained extremely elevated. People who fear mass transit in a pandemic have buoyed used car sales and scooped up what little was left in inventory over the summer. Used car prices are still up 10% from a year ago.

Rents of primary residences rose 0.1% during the month and are up 2.3% from a year ago. Softness in rents in the largest cities has been partially offset by a rise in rents in less congested areas. We have yet to see the full effects of rent forbearance. Existing and additional aid will have more support for those hit hardest by the crisis, to help them catch up on bills that they could not pay in recent months. Moody’s estimates that some 12 million people now owe nearly $6000 in missed rents and utility bills.

Medical care and prescription drug prices both fell slightly during the month. Prescription drug costs actually fell for the year but that will be short-lived. Big pharma announced a flurry of new price hikes for January. Retirees have suffered the worst in economic if not health outcomes of the crisis. Many are trying to scrape by on fixed incomes, which have taken it on the chin during the crisis. Social security increases are tied to the year-over-year gain in the overall CPI, which was a tepid 1.4% in December.

The core CPI, which the Federal Reserve watches for signs of burgeoning inflation, finished the year with a 1.6% increase from a year ago. That is only slightly above the low point we hit in inflation in May and June and one of many reasons the Fed is in no mood to raise rates anytime soon.

Bottom Line
Overall inflation ended 2020 more than a half of one percent behind the pace we saw a year ago. The problem is where prices were weak - in travel and entertainment. That is not where those who have suffered the most are spending what little they have in their pockets. Food and shelter are more important to them.

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