The Economy

July Jump in Prices Eases Disinflation Fears

Core inflation rose 0.6% last month, the largest gain since January 1991, as the disinflationary impact of the coronavirus continued to wear off.
Matthew HellerAugust 12, 2020

A measure of underlying inflation increased by the most in 29-1/2 years in July as the disinflationary impact of the coronavirus pandemic continued to wear off.

The Labor Department reported Wednesday that the consumer price index rose 0.6% for the second month in a row. Economists polled by MarketWatch had forecast a 0.4% advance.

The cost of living had declined from March through May as the pandemic confined consumers to their homes, with the 0.8% drop in April the largest since December 2008.

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Core CPI, which excludes the volatile food and energy components, also jumped 0.6% last month — the largest gain since January 1991. In April, it fell a record 0.4%.

The July prices report “should end any speculation that the pandemic-related slump in demand will quickly push the economy into a deflationary spiral,” said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

As Reuters reports, “The jump in prices is likely an unwinding of sharp declines experienced when nonessential businesses were shuttered in mid-March to slow the spread of the coronavirus.”

Higher gas prices accounted for about one-quarter of the increase in consumer inflation in July, rising 5.6% after soaring 12.3% in June. Prices for rent, medical care, new and used vehicles, auto insurance, passenger fares, apparel, and wireless phone and Internet service also increased.

But food prices fell 0.4% after three large increases in a row.

Despite the gains of the past two months, economists are not expecting a surge in inflation, particularly with at least 31.3 million people on unemployment benefits in a services-oriented economy.

“At this point, it appears that the recent pickup in inflation has been more about the retracement from the lows in March and April rather than a telling sign of mounting price pressures,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors.

The Fed’s preferred measure of inflation, the core personal consumption expenditures price index remains well below its target of 2%. In June, core PCE rose 0.9% on a year-year-ago and economists are expecting a 1.4% gain in July.