• Consumer prices rose 0.6% month/month in July, matching June’s increase, a larger increase than markets were expecting. Total CPI was up 1.0% year-on-year, an acceleration from 0.6% in June.
  • More surprising was a 0.6% month/month increase in prices excluding food and energy in July – the largest increase in the index since 1991. Many items where prices were weak during the peak of the shutdowns, jumped sharply in July. This lifted core inflation on a year/year basis to 1.6%, up from 1.2% in June.
  • Prices jumped for both core goods and services. On the goods side, hearty increases were seen in apparel (+1.1% m/m), used cars and trucks (+2.3% m/m) and new vehicles (+0.8%). However, all of these items still have fairly muted increases on a year/year basis. For core services, the index for motor vehicle insurance increased sharply in July (+9.3% m/m), as it did the previous month. The indexes for shelter (0.2% m/m), communication (+1.9% m/m), airline fares (+5.4% m/m), and medical care (+0.4% m/m) also increased in July, while the index for recreation (0.6% m/m) declined, as it did in June.
  • Energy prices rose 2.5% on the month in July. However, on a year-on-year basis energy prices are still 11.2% lower than a year ago. Prices at the pump were up 5.3% month/month in July, but are also deeply below their year ago levels (-20.3%).
  • Consumers finally got some relief on their grocery bills, as good prices fell 0.4% m/m. The decline was driven by a 1.1% drop in prices for food at home, although the category remains up 4.6% versus a year ago.
  • In-person data collection continued to be suspended by the Bureau of Labor Statistics in July, which in addition to many business closures disrupts the typical data collection process. Response rates for the commodities and services prices survey were 70% in July, down from 86% pre-pandemic, and unchanged from June.

Key Implications

  • Many consumer prices that had seen deep discounting during the peak of the shutdowns bounced back sharply in July. However, most of these categories with large rebounds have not returned to pre-pandemic levels. Indeed, most of them are still down year-on-year. As a result, core inflation remained below 2% in July.
  • All told, July’s inflation data provides evidence that many of the short-term deflationary forces have reversed. But, with unemployment still sky-high at 10.2%, these sharp monthly increases are not expected to be sustained over the medium term. And, some of the more persistent categories in inflation, namely shelter, continued to cool in July. Core inflation has returned a little more rapidly than we expected at the time of our June forecast, but we still expect that substantial economic slack will keep inflation muted over the next couple of years.


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