Consumer Prices Jump Higher, Double Expectations

Consumer confidence
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U.S. consumer prices jumped higher in July as the economy absorbed massive fiscal stimulus aimed at cushioning the pandemic’s blow on jobs and output.

The Labor Department said the Consumer Price Index — which measures what consumers pay for items from groceries, to appliances, to airline tickets, to medical services — moved 0.6 percent higher for the consecutive second month, doubling the 0.3 percent forecast by economists. Compared with a year ago, the CPI is up 1 percent, about two-tenths of a percentage point above expectations.

The two consecutive monthly gains suggest that the federal government’s huge reponse to the coronavirus—including $1,2000 checks to most Americans, $250 billion in $600 a week enhancements to unemployment benefits, and hundreds of billions of dollars of aid to small businesses—has boosted demand even as the economy faced massive constraints from lockdowns, social distancing, and high unemployment.

Much of that fiscal policy boost, however, has fallen away or been diminished. The $1,200 “impact payments” were issued this spring and have not been reauthorized. The enhanced unemployment benefits expired at the end of July and may be replaced in September by a smaller enhancement under an executive order issued by President Trump last week, although states have said the rollout could be delayed. The funds from Paycheck Protection Program, which made loans to small businesses, have mostly been used and businesses are not permitted to borrow again from the program.

President Trump also ordered a pause in the collection of employee-side payroll taxes, which will likely boost the take home pay of many workers. Although how much of a boost workers see and how much of that they are willing to spend remains to be seen since, technically, the payroll taxes are still owed. Employers may choose to keep withholding the money or employees may hold on to it despite Trump’s promise to turn the pause into a tax cut after the election.

That may mean the boost in demand for many goods and services that lifted prices in July could be short-lived. Alternatively, the economy could see a “hand-off” scenario, where falling unemployment and declining social-distancing restrictions sustain demand going forward.

Core consumer prices, which eliminate the effects of changes in the volatile food and energy categories, rose 0.6 percent, beating expectations for a 0.2 percent rise. Over the last 12 month, core CPI is up 1.6 percent.

The gasoline index continued to rise in July after increasing sharply in June and accounted for about one-quarter of the monthly increase, the Labor Department said. This was partially offset by the 0.4 percent decline in the food index. The index for food at home fell 1.1 percent after rising 0.7 percent in June.

Some of the grocery store items that had risen sharply in recent months saw price declines in July. The index for meat, poultry, fish, and eggs dropped 3.8 percent in July. This was led by the price for beef, which fell 8.2 percent in July after increasing sharply in recent months. Five of the six major categories of food got less pricey in the month. Over the pat year, the gauge for prices of food at home is up 4.6 percent.

There’s evidence of rising demand for dining out. The index for food away from home rose 0.5 percent in July, the same boost it saw in June. The index for full-service restaurant meals increased 0.4 percent, following a 0.9-percent increase in June. Compared with a year ago, full-service restaurant prices are up 2.9 percent.

The airline fares index increased 5.4 percent in July following a 2.6-percent rise in June, highlighting the fact that Americans are slowly flying more this summer than they were in late spring. Compared with a year ago, however, prices are down 23.7 percent.

The measure of appliance prices rose 1.1 percent in July, following a 1.7 percent rise in June. Compared with a year ago, these are up 4.4 percent.

Prices of new cars and trucks rose 0.8 percent and are up 0.5 percent compared with a year ago. The index for used cars and trucks increased 2.3 percent over the month, ending a 3-month string of declines.

The prices of clothing, which declined a lot as people staying at home shopped for apparel less, rose 1.1 percent. Compared with a year ago, apparel prices are down 6.5 percent. Footwear prices rose 1.2 percent in July and 1.4 percent in June but are still down 3.3 percent from a year ago.

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