The consumer price index (CPI) rose by 0.6% in July, well above expectations. The core index also rose by 0.6%, signaling that the forces pushing prices higher aren’t limited to more volatile food and energy costs. The second consecutive monthly increase lifted the headline index to 1.0% over the preceding 12 months, while the core index rose by a more notable 1.6% during that same period.
Prior to the last two monthly reports, inflation had fallen sharply as the economy took a nosedive in March. As demand for most goods and services — notably excluding groceries — collapsed, prices also fell. The strong rebound in economic activity and pickup in demand in the past few months alleviated the negative price impact of the preceding rapid decline in spending.
While price increases were relatively widespread, outsized gains in energy, vehicle, and transportation costs point to increased mobility and some pent-up demand for travel and bigger-ticket purchases. Falling grocery prices were partially offset by increasing restaurant pricing, also suggesting some shift in demand resulting from an incremental return toward dining out or ordering in.
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.
Parts of the economy are still feeling the effects of reduced production capacity as a byproduct of policies introduced to encourage social distancing and reduce the potential spread of COVID-19. This is most notable in certain service businesses and in the reduced capacity at many restaurants. Increasing demand could drive prices even higher in those impacted parts of the economy in the coming months if capacity remains constrained. The path forward will likely be dictated by potentially competing forces: the degree to which government policy restricts business and consumer activity to address health risk, and the extent to which individuals attempt to return to a more normal, pre-pandemic lifestyle.
Conversely, the recent surge in cases creates some doubts about the likelihood that recent progress on reopening the economy can continue unabated, and the risk of a second wave still looms.
For now, elevated unemployment and economic slack appear likely to keep a lid on inflation. Before the recession, inflation was running below the Fed’s 2% target even with the jobless rate at a half-century low. Reconfigured supply chains and reduced production capacity may alleviate some of the impact of lower demand, but inflation appears likely to remain contained in the near term.
Our experts were recently quoted on this topic in the following publications:
Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.
Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis non-factual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.