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.