Consumer prices up 5.4%, but core inflation falls short

A customer wearing a protective mask shops inside an Albertsons grocery store in San Diego, California, June 22, 2020.

Bing Guan | Bloomberg | Getty Images

Prices that Americans pay for everyday goods and services continued their recent acceleration in July as pent-up demand for travel and restaurants kept inflation hot, but about where economists had expected.

The Labor Department reported Wednesday that its consumer-price index rose 5.4% in July from a year earlier, in line with June’s figure and matching the largest jump since August 2008. The government said CPI increased 0.5% on a month-over-month basis.

Excluding energy and food, CPI rose by 0.3% last month, shy of economist expectations of a 0.4% increase and well below June’s rise of 0.9%. The core figure is up 4.3% over the last year, a slight deceleration from June’s 4.5%.

Economists often consider core CPI to be a more reliable indicator since it’s insulated from the frequent swings in petroleum and food prices.

As one of the most-cited inflation gauges, the consumer-price index measures changes in how much American consumers pay for everyday goods and services including groceries, gasoline, clothes, restaurant meals, haircuts, concerts and automobiles.

The CPI and other price measures have been on the rise in 2021 in large part thanks to a comeback in consumer spending and U.S. gross domestic product.

Economic activity as measured by GDP rose at an annualized rate of 6.5% in the second quarter as Americans flocked to restaurants, headed for summer vacations and otherwise resumed activities that Covid-19 had hindered.

Consumer spending, bolstered by the nationwide rollout of vaccines, jumped 11.8% during the three months ended June 30, the second-fastest rate since 1952.

At the same time, the pent-up demand for travel, retail and restaurants has left many businesses scrambling to keep up and led to several hiccups on the supply side of the U.S. economy.

Employers who have struggled to find workers have hiked pay or offered signing bonuses to help fill the record 10.1 million job openings across the economy at the end of June. The leisure and hospitality sector, which includes restaurants, bars and hotels, has one of the highest levels of job openings at more than 1.6 million.

But instead of absorbing higher labor and material costs, some businesses have begun to pass on the impact of higher wages to their consumers. A concurrent shortage of semiconductors has whacked auto production and is a leading cause in a recent spike in new and used automobile prices.

The Federal Reserve has been keeping a close eye on inflation prints since it’s the central bank’s job to maximize employment and keep prices stable.

Chairman Jerome Powell and other officials acknowledge the recent acceleration in prices, but believe that the inflation is “transitory” and that prices won’t continue to increase at their current pace for too long.

“Inflation is running well above our 2% objective, and has been for a few months, and is expected to run certainly above our objective for a few months before we believe it’ll move back down toward our objective,” Powell said during a press conference in July. “The question of whether we’ve met that objective, formally, is really one for the committee to make.”

The Fed has kept interest rates near zero for the past 12 months and continues to flush financial markets with $120 billion in emergency monthly bond purchases. Some members of the central bank, including Vice Chair Richard Clarida, have started to give forecasts for eventual interest-rate increases.

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