Consumer Goods Prices and Inflation

The cost of living rose in July by more than most economists expected, but there’s not a lot of concern that we’re about to experience a burst of inflation.

While it’s true the government is pumping a lot of money into the economy, unemployment remains high and the economy isn’t growing. In fact, it’s moving in the other direction.

The Labor Department reports its Consumer Price Index (CPI) rose 0.6 percent in July, fueled mostly by an increase in gasoline prices. However, prices at the pump have leveled off in the last couple of weeks and have actually drifted lower. The government reports that the energy index increased 2.5 percent in July as the Index tracking gasoline prices rose 5.6 percent. 

Lower food costs

Food prices for July moved lower, with the food index declining by 0.4 percent. It was driven lower by a 1.1 percent decline in food prepared at home.

The cost of car insurance moved sharply higher last month as the steep discounts offered by major carriers during the initial pandemic expired. Consumers also paid more last month for rent, communication, used cars and trucks, and health care services.

Over a 12-month period, inflation is rising at 1.0 percent, not nearly enough to set off alarm bells. The Federal Reserve would actually like prices to rise at a 2.0 percent rate. Economists are generally pleased with the July report. Paul Ashworth, chief U.S. economist at Capital Economics in Toronto, told Reuters that inflation in July appeared to be in a healthy spot.

“This should end any speculation that the pandemic-related slump in demand will quickly push the economy into a deflationary spiral,” he said. “But this is not a sign that the U.S. is instead about to experience a bout of much high inflation because of supply restrictions.”

Inflation over the last 12 months

When the July numbers are placed in the context of the last 12 months, the cost of food has risen 4.1 percent since July 2019. Even though it rose in July, the cost of energy has actually declined 11.2 percent over the last year.

There are areas of the economy where consumers have faced rising costs and may be likely to do so in the coming months. While the price of prescription drugs dipped slightly last month, the cost of physician services jumped 0.7 percent and hospital services cost 0.2 percent more.

There was a big jump in the cost of wireless communication services, which rose 3.6 percent. Used vehicle prices rose 2.3 percent, ending three straight months of declines.

The Labor Department reports its Consumer Price Index (CPI), the chief way it measures inflation, rose 0.2 percent in December, a slowdown from the 0.3 percent rise the month before.

Taking the previous 11 months into consideration, the official inflation rate for all of 2019 was 2.3 percent, in line with the Federal Reserve’s target. Even so, it was the largest 12-month increase in prices since 2018.

But whether or not you felt financially stressed last month all depends on what you purchased. The cost of gasoline, housing, and health care all went up last month, accounting for most of the increase in the overall CPI.

The food index, which measures costs for food consumed at home and in restaurants, also went up by 0.2 percent. When food and energy are removed from the equation, prices rose just 0.1 percent.

The monthly report shows that consumers also paid more last month for clothing, car insurance, new vehicles, and recreation. They paid less for used cars and trucks, household furnishings and operations, and airline fares.

Energy led the increase

Energy costs made the biggest move last month, primarily due to rising gasoline prices. The energy index was up 1.4 percent in December, its third straight increase. 

Energy was driven higher by a 2.8 percent jump in the gasoline component, as prices at the pump drifted higher at a time they were predicted to fall. By the end of the year, the average price of gasoline was about 36 cents a gallon higher than the year before.

Food costs were pushed higher by increases in prices for meats, poultry, fish, and eggs. It was the only grocery store group to go up in price, rising 1.3 percent. Within that group, beef and eggs posted the largest increases.

Analysts say the overall inflation number, which remains tame, is likely to persuade the Fed that it’s on the right course and there should be no adjustment in interest rates, at least in the near term.

The latest report from the government on consumer prices shows inflation remains tame, but a survey of consumers shows something different. Many consumers, especially women, don’t think they’re keeping up.

The Bureau of Labor Statistics reports that the Consumer Price Index (CPI) rose in October by 0.4 percent, creating an inflation rate of 1.8 percent over the last 12 months. That’s slightly below where the Federal Reserve would like to see prices.

The official inflation rate rose last month largely because of higher gasoline prices, which have begun to slowly come down -- except in California. The index covering all forms of energy jumped 2.7 percent last month. The cost of medical care, recreation, and restaurants also rose.

More than half don’t think they’re keeping up

The prices consumers paid for clothing, household furnishings, new cars and trucks, and airline tickets went down in October. But if you didn’t buy any of those things, it might not feel like inflation is so tame.

That’s the conclusion of a survey of consumers conducted by CPI Inflation Calculator, a private online tool that analyzes inflation trends using official government data. A survey of 1,500 consumers between the ages of 18 and 65 found 56.1 percent don’t believe they’re keeping up with the rising cost of living.

Women were even more likely to say inflation isn’t so tame, with more than 63 percent of female respondents giving that response. Women 18 to 24 years of age feel the pinch even more, with 75 percent saying they aren’t keeping up with the cost of living. Fewer than 60 percent of men in that same age group gave that response.

Only 30 percent of the consumers participating in the survey said they are able to keep up with inflation. But again, when broken down demographically, more men than women declared that inflation is not a problem. Forty-two percent of men between the ages of 45 and 64 were not concerned about rising prices.

It often depends on what you buy

Whether a consumer is affected by inflation often comes down to where the individual consumer spends their money. If they have health problems or a child in college, they are most likely to think inflation is a problem. The costs of both of those categories are rising much faster than the rate of inflation.

Geography may also have something to do with it. Consumers who live in large coastal cities likely encounter a generally higher cost of living than people living in small- to medium-sized cities.

Inflation picked up its pace in July but is still relatively low, according to the latest report from the Labor Department.

The Consumer Price Index (CPI) rose 0.3 percent in July after going up just 0.1 percent in June. Over the last 12 months, the inflation rate is 1.8 percent, just below the Federal Reserve’s desired inflation rate of 2 percent.

July prices rose mainly on the basis of more expensive housing and gasoline, though gas prices have dropped in August and are expected to keep falling. The index for food was unchanged for the second month in a row. It cost less to prepare meals at home last month, but the cost of visiting restaurants went up.

“The index for all items less food and energy rose 0.3 in July, the same increase as in June,” the Labor Department said in its release. "The July rise was broad-based, with increases in the indexes for shelter, medical care, airline fares, household furnishings and operations, apparel, and personal care all contributing to the increase. The index for new

vehicles was one of the few to decline in July.”

More expensive fruit and vegetables

Consumers paid more last month for fresh fruits and vegetables, with the prices of those items rising 0.3 percent. The cost of cereals and bakery products increased by the same amount, with the price of meats, poultry, fish, and eggs going up 0.1 percent.

But three of the major grocery store food group indexes declined last month. The cost of nonalcoholic beverages fell for the second straight month, declining 0.4 percent. The index for dairy and related products fell 0.3 percent after rising in each of the previous five months.

The report may have an uncertain impact on the Fed’s decision to cut interest rates or leave them at present levels. Prices rose, but not by that much. Another interest rate cut could push the inflation rate to 2 percent, the Fed’s desired target.

Even with sharply rising gasoline prices in much of the nation, inflation was fairly tame last month. The Labor Department reports that the Consumer Price Index rose 0.3 percent in April following a 0.4 percent increase in March.

Gasoline accounted for much of the increase, rising 5.7 percent. The overall energy index was up 2.9 percent.

Partially offsetting more expensive gasoline, food prices actually went down in April, recording their first decline in nearly two years.

The cost of housing, medical care, education,  and new vehicles all went up in April. But the cost of used cars and trucks, apparel, and household furnishings and operations were among those that declined during the month.   

‘Happy story for families’

“The inflation story continues to be a happy one for American families, coming in tame for another month,” Robert Frick, corporate economist for Navy Federal Credit Union, said in an email to ConsumerAffairs. “With wages rising above 3 percent and the Consumer Price Index hovering around 2 percent,  real wages are rising from an average of 1.2 percent for low-skilled workers to 1.6 percent for high-skill workers.”

Frick says workers aren't seeing wage increases as high as in previous late-stage expansions because of slack in the labor force, but he said wages could rise if the labor market tightens again.

The slow rise in consumer prices, along with more modest increases in wage growth, will likely influence the Federal Reserve to hold the line of further rate hikes this year.

Inflation jumped in March due to higher gasoline prices and rising food costs.

The Labor Department reports that the Consumer Price Index (CPI) rose 0.4 percent in March, twice the rate of February’s increase. Despite the sizable increase, inflation over the last 12 months is still running just under the Federal Reserve’s target of 2 percent.

Consumers saw the biggest price hikes last month in gasoline and other energy costs. That category was up 3.5 percent, accounting for about 60 percent of the seasonally adjusted all items monthly increase.

The index tracking gasoline prices rose sharply, along with the electricity index. With the heating season mostly over, natural gas prices were slightly lower.

Higher food costs

Food costs were higher last month, rising 0.3 percent. That follows a 0.4 percent increase in February. Most of the higher costs were in the produce section, with fresh vegetables rising 2 percent and fresh fruit going up 1.2 percent.

Despite the monthly rise in the CPI, Robert Frick, corporate economist for Navy Federal Credit Union, says inflation is still fairly tame, given the slow rise in wages.

“The index for all items except food and energy was up just 0.1 percent,” Frick told ConsumerAffairs. “The difference between this core number and headline number was mainly due to the energy index rising 3.5 percent in March. The food index also showed an increase, and in the last year that portion of CPI was up 2.1 percent, the most since 2015.”

Nothing to alarm the Fed

The CPI strips out food and energy costs from its main inflation number because those two sectors tend to be highly volatile. Frick says rising food costs may be a sign of economic health because consumers feel confident enough to splurge at the supermarket and at restaurants.

“These steady-as-it-goes numbers should have little effect on the Federal Reserve's decision to raise, lower or stand pat on rates,” he said.

Two sectors that were down in February were back up in March. Medical care costs rose 0.3 percent last month, largely due to a 0.6 percent jump in the cost of prescription drugs.

New car costs were 0.4 percent higher last month after giving ground in February. Meanwhile, clothing prices dropped 1.9 percent in March after going up in February.

Borrowers and lenders alike breathed a collective sigh of relief on Wednesday as Federal Reserve Chairman Jerome Powell’s forecast gave two thumbs up. In a nutshell, Powell’s outlook was affirmative.

“My colleagues and I have one over-arching goal: to sustain the economic expansion with a strong job market and stable prices for the benefit of the American people. The U.S. economy is in a good place, and we will continue to use our monetary policy tools to keep it there,” he said.

As far as interest rates and inflation go, Powell envisioned that interest rates will be in a holding pattern for a while and confirmed that inflation continues to be in check.

“We don’t see data coming in that suggests that we should move in either direction,” Powell commented after officials lowered their projected 2019 interest-rate increases this year to zero from two. “They suggest that we should remain patient and let the situation clarify itself over time. It may be some time before the outlook for jobs and inflation calls clearly for a change in policy.”

The Fed reports that on a 12-month basis, inflation has declined across the board, pegging the shift on lower energy prices. Looking further down the balance sheet, inflation for non-food and non-energy items are holding steady near 2 percent.

“On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed,” wrote the agency in its review of the current financial climate.

The deeper dive

While low inflation sounds like a good thing from a consumer angle, Powell called out global price pressures as being weak -- in his words, “one of the major challenges of our time.”

“I don’t feel that we have kind of convincingly achieved our 2 percent mandate in a symmetrical way,” Powell reflected. “That gives us the ability to be patient, and not move until we see that our target goals are being achieved.”

The jury might be out for a while trying to decipher Powell’s request for patience. “It was very dovish,’’ Stephen Stanley, chief economist at Amherst Pierpont Securities LLC, told Bloomberg. “It suggests that the Fed has jumped to the conclusion that the weakening we have seen since the start of the year will be more fundamental and more persistent, rather than being temporary crosscurrents.”

“Policy makers appear to have cooled on the notion of any meaningful, lasting impact from last year’s tax reforms and instead project a return to trend growth, a stabilization of the unemployment rate and little pickup in price pressures. Amid this backdrop, they do not see much need to further normalize interest rates,” wrote Bloomberg economists Carl Riccadonna, Yelena Shulyatyeva, and Tim Mahedy.

The Consumer Price Index (CPI), the government’s primary inflation gauge, rose 0.2 percent in February after being flat the month before. In the last 12 months, the CPI is up 1.5 percent, well below the Federal Reserve’s inflation target.

The means the Fed is even more likely to hit the pause button on additional interest rate hikes for the rest of 2019. Robert Frick, corporate economist at Navy Federal Credit Union, says the numbers were up but not as much as expected.

“Inflation doesn’t appear to be heating up enough to trigger the Fed to raise interest rates, and it also shows that increases in wages aren’t pushing up prices much,” Frick said in an email to ConsumerAffairs. “No Fed action, tame inflation, and a good wages and jobs situation mean we remain in the Goldilocks zone for American workers and consumers.”

Some rising costs

Despite the low numbers consumers faced higher costs last month for housing, food, and gasoline. Food costs were up 0.4 percent, their largest monthly increase since May 2014, as both the food at home and food away from home indexes increased.

The index tracking the cost of gasoline rose 1.5 percent in February, following three consecutive monthly declines. That pushed the overall cost of energy up 0.4 percent despite declines in the electricity and natural gas indexes.   

While it’s always good for consumers when prices remain stable, the best news in the report is the influence on the Fed’s interest rate policy. The Fed’s discount rate directly correlates to credit card interest rates.

If the Fed holds off on rate hikes for the rest of 2019, it means consumers’ interest rates on their credit card balances won’t be going up.

You might not notice any change in the high cost of college or health care, but the overall inflation rate didn’t budge in January.

The Bureau of Labor Statistics reports that the Consumer Price Index (CPI) was unchanged last month. For the year, the CPI is up only 1.6 percent, well below the Federal Reserve’s target of 2 percent.

Food and energy costs, which together were lower in January, kept the CPI in check. When those two categories are removed, prices were up 0.2 percent. Robert Frick, corporate economist at Navy Federal Credit Union, says it’s almost as though Goldilocks wrote the CPI report since it was “just right.”

“The overall index was unchanged for January, and all items were up just 1.6% over the last year,” Frick said in an email to ConsumerAffairs. “Just as important, wages again ticked up, rising 0.1 percent in January. No increase in inflation combined with a rise in wages means American workers' real wages -- nominal wages minus inflation -- increased for another month.”

Moving in the right direction

While wages were higher, Frick says consumers haven’t seen the kind of real wage gains that have been present in other late-stage expansions. Even so, he says paychecks are moving in the right direction -- and the report holds more good news for consumers.

“This also argues against the Fed raising rates soon, at least, keeping the expansion expanding to the benefit of workers,” Frick said. “They should expect a continued strong jobs market together with rising real wages for the foreseeable future."

If the Fed decides there is no need to raise interest rates again, it means the interest rate on credit cards will likely remain stable over the next few months. Consumers carrying large credit card balances have seen their credit card interest payments rise every time the Fed hiked the federal funds rate.

Gasoline prices fall

In a big break for consumers, energy costs went down for a third consecutive month. The price of gasoline was down 5.5 percent.

The price of food was slightly higher last month, rising 0.2 percent from December. The biggest increase in food costs came in the restaurant sector.

Consumers paid more for housing, clothing, medical care, recreation, and household furnishings and operations last month. Airfares were cheaper and so were car insurance policies.

Despite the stock market's recent hand-wringing over inflation, there was little evidence of it in the U.S. economy last month.

The government's Consumer Price Index (CPI) rose a modest 0.1 percent in September, a slowdown from August's 0.2 percent rise. For the last 12 months, the nation's inflation rate is 2.3 percent.

Fears of rising prices have driven stock prices sharply lower this week, mainly because interest rates paid on government bonds have moved significantly higher. Stock traders have worried that rising bond yields – sometimes a sign of inflation – would prompt the Federal Reserve to double-down on its policy of raising the federal funds rate.

Robert Frick, corporate economist at Navy Federal Credit Union, says low inflation and a strong economy should ease fears of an overly-aggressive Fed.

“Inflation fears right now are based on historical models, not data, and the data says price and wage growth are not in danger of overheating the economy,” Frick told ConsumerAffairs. “This CPI report supports the Fed's plan of gradual rate increases, and Fed Chair Powell's wait-and-see strategy before changing that plan.”

And even though bond yields have been rising, Frick notes they remain well below historical averages.

What little inflation there was in the economy last month had mostly to do with housing. The CPI report shows shelter accounted for half of the seasonally adjusted increase.

Despite the rise in gasoline prices the energy sector was lower in September. Food prices were largely unchanged.

Just as consumers are finally increasing their incomes, they face another rising cost. Just about every type of consumer loan is getting more expensive.

This week, the yield on the Treasury Department's 10-year bond rose above three percent and appears poised to keep climbing. Even if you don't have money invested in bonds, it could affect you if you're buying a home or refinancing.

That's because mortgage rates are tied to the 10-year note. When its yield goes up, so do mortgage rates. The Mortgage Bankers Association (MBA) reports the 30-year fixed rate mortgage rate averaged 4.88 percent last week, the highest since 2011.

That's still low by historical standards, but since the financial crisis a decade ago, mortgage rates have bounced between 3 percent and 4 percent. When the mortgage rate is 5 percent or more -- a normal rate during the housing boom -- consumers face a higher monthly payment for the same house they could have purchased with a 3 percent mortgage.

Fed keeps hiking

Unfortunately, that's not the only loan that's becoming more costly. The Federal Reserve continues on its path of gradually raising the federal funds rate -- the rate it charges member banks. Those increases get passed along to consumers who carry a credit card balance.

The average credit card rate is already at a record high and will go up each time the Fed hikes rates. The credit bureau TransUnion estimates that affects about 92 million consumers who carry credit card balances and will create a financial hardship for 9 million of them.

Higher car payments

Auto loans are also influenced by the federal funds rate, as are just about all loans consumers get from a bank. With the Fed's tightening policy, the monthly payment on new and used cars will get more expensive.

What's it mean for consumers? If you've begun shopping for a house, you might have to lower the price range in which you're looking. If you're selling a home, you might need to be flexible on the price. If you're thinking about buying a new car, it might pay to consider a late model used car.

And interest rates are likely to move higher before they go down again. The Fed meets next week and is expected to hike its key interest rate for the third time this year.

The government reports the Consumer Price Index (CPI) rose 0.2 percent in August, the same as July, suggesting inflation is largely absent from most of the economy. Much of the increase came in the form of more costly housing and energy.

The Bureau of Labor Statistics' (BLS) energy index rose 1.9 percent, largely due to rising gasoline prices. The cost of shelter rose even more. As we reported Wednesday, consumers paying rent and making mortgage payments are encountering rising costs. The BLS' shelter index jumped 3.0 percent last month.

Food costs were up last month, but only slightly. The cost of food prepared at home was roughly the same as the month before.

The CPI excluding both food and energy -- both highly volatile components -- rose only 0.1 percent in August, the smallest monthly increase since April. Consumers faced lower costs last month for apparel, medical care, communication, recreation, and personal care.

Producer prices fall

On Wednesday, BLS reported the Producer Price Index (PPI), a measure of costs facing producers and wholesalers, actually went down, falling 0.1 percent. The report shows the index was pulled lower by a decline in the cost of services.

The PPI is often viewed as an early indicator of future inflation, since higher costs paid by producers are normally passed on to consumers.

Amid this backdrop of stable prices, consumers' incomes rose slightly last month. The BLS reports real average hourly earnings for all employees increased 0.1 percent from July to August.

Incomes slowly rise

The agency attributes the gain to a 0.4-percent increase in average hourly earnings combined with a 0.2-percent increase in the CPI. Robert Frick, corporate economist at Navy Federal Credit Union, says consumers are getting ahead, but just barely.

"In the race between wage growth and inflation growth, wages edged ahead by a nose, with an annualized gain of 2.9 percent versus 2.7 percent for inflation, so real wage increases are now 0.2 percent, annualized," Frick told ConsumerAffairs. "That's scant comfort for American workers, but with the labor force continuing to tighten and inflation subdued, we may begin to see real wage growth climb to a percentage point or more in the next year, which would be typical - and welcome - for this late stage of an expansion."

Consumers may be taking home a little more money because they're working harder. The BLS report shows there was a 0.6 percent increase in the average workweek over the last 12 months.

On the heels of the Conference Board's finding that consumer confidence is at an 18-year high, the government reports consumers increased their spending again in July.

The Commerce Department's Bureau of Economic Analysis (BEA) reports consumer spending rose 0.4 percent in July, matching June's increase. As a result, government economists say it put upward pressure on prices. The underlying inflation rate hit 2 percent in July, which is right where the Federal Reserve wants it.

Economists say the strong spending number suggests the economy is still expanding in the third quarter, after the government this week reported second quarter gross domestic product (GDP) rose 4.2 percent.

The numbers are likely to keep the Federal Reserve on its path of slowly raising interest rates, a policy recently criticized by President Trump as potentially harmful to the economy. But Fed Chairman Jerome Powell has defended the policy, saying the economy is growing to the point that it no longer needs cheap money.

Two headwinds

Economists say the economy is doing well in spite of two headwinds – the impact of the trade war and a slowdown in the housing market. In terms of the latter, Economist Joel Naroff says the slowdown may have a silver lining for people looking for a home.

“With housing sales ebbing, it should not be surprising that the surge in prices is fading as well,” Naroff wrote in his blog. “The S&P CoreLogic Case-Shiller national home price index rose modestly in June. Over the year, prices are still going up solidly, but it looks like the rate of gain may have peaked.”

But houses may be the only thing that isn't getting more expensive. The BEA data shows a rising trend in the personal consumption index (PCE) in July, double the increase from June.

The year-over-year increase of the core PCE price index, which excludes food costs, rose slightly from June and hit the Fed's 2 percent target for the second month this year.

Incomes lagging

Consumers may be spending more, but they aren't earning that much more. July's personal income rose 0.3 percent in July, slightly lower than June's gain. The savings rate declined from 6.8 percent to 6.7 percent.

That suggests much of the increase in July consumer spending was done with credit cards, which isn't a problem as long as consumers can pay it back.

In one troubling note, however, a new study by NerdWallet suggests consumers were having a difficult time paying for last year's holiday purchases. According to the study, credit card delinquencies totaled $23 billion in the first quarter of the year.