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CPI Repeats June Increases

RFP
The consumer price index (CPI) rose 0.5% in July from June and 5.4% from a year ago, the same as in June. Sharp increases in both food and energy prices contributed to the gains. Food prices at grocery stores and away from home picked up. A jump in the cost of proteins at the grocery store - meats, fish, poultry and eggs - is driving overall gains. That category alone is up nearly 15% since July 2019, before the onset of the pandemic. The cost of food away from home has also accelerated as higher input costs are being passed along to consumers. That component of the CPI was up 8.1% since July 2019 while prices at the gas pump jumped more than 13% from July 2019. Prices at the pump surged more than 40% from a year ago; they were still pretty low during the summer of 2020.

The surge in commuting costs is particularly hard for low-wage workers who now may have to commute outside urban centers to find jobs or commute further to employers in vacation hubs and the suburbs. Those increases are another hurdle to clearing additional take-home pay, even after the recent increases in wages for low-wage workers. Wages for nonsupervisory leisure and hospitality workers have risen 13.6% since July 2019.

The core CPI, which strips out the food and energy components, rose a more moderate 0.3% compared to June and 4.3% from a year ago. The peak so far in year-over-year increases in core inflation during the pandemic was the 4.5% we saw in June. That was the hottest core measure of inflation since the early 1990s. Gains were once again driven by steep increases in vehicle prices; computer chip shortages have left dealers’ lots empty. Large increases in hotel room rates appeared again. Apparel, which has been flying off the shelves, continued to move up in price. We are starting to see the base effects tied to the downdraft in prices a year ago dissipate.

Airfares and rental car rates started to moderate last month. Look for another dip as the Delta variant of COVID starts to place a damper on overall demand in August. Credit card data shows that people started to cancel their vacations to hot spots as contagion worsened.

Shelter costs remain subdued outside of hotel room rates. This is an area we will be watching closely. Rents decelerated during the pandemic, especially in what were once the hottest cities when young people left. Rents are now bottoming as they return to offices and in-person college programs.

The owner’s equivalent rent component of the CPI also decelerated during the crisis as low mortgage rates and a surge in mortgage refinancing pushed down monthly payments. Those shelter measures are expected to pick up as the effects of skyrocketing home values work their way through to monthly mortgage obligations.

Bottom Line
Core inflation is starting to show signs of cooling from the pandemic-induced surge during the spring months. Some of that is due to the emergence of the Delta variant, which could dampen inflation in August. It is notable that the Delta variant is disrupting both supply and demand, which will leave the Federal Reserve uneasy as we move into the turn of the year. The Fed is still expected to taper its asset purchases; timing on rate hikes is still further out.

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