WASHINGTON: US consumer prices rose more than expected in July, with a measure of underlying inflation increasing by the most in 29-1/2 years amid broad gains in the costs of goods and services.
The report from the Labour Department yesterday, however, probably does not mark the start of worrisome inflation, and the Federal Reserve is likely to continue pumping money into the economy to aid the recovery from the Covid-19 recession.
The jump in prices is likely an unwinding of sharp declines experienced when nonessential businesses were shuttered in mid-March to slow the spread of the coronavirus. The higher prices further dispel fears of deflation, a decline in the general price level that is harmful during a recession as consumers and businesses may delay purchases in anticipation of lower prices.
“This should end any speculation that the pandemic-related slump in demand will quickly push the economy into a deflationary spiral,” said Paul Ashworth, chief US economist at Capital Economics in Toronto. “But this is not a sign that the US is instead about to experience a bout of much high inflation because of supply restrictions.”
The consumer price index rose 0.6 per cent last month, with petrol accounting for a quarter of the gain. The CPI increased by the same margin in June. In the 12 months through July, the CPI accelerated 1pc after climbing 0.6pc in June.
Excluding the volatile food and energy components, the CPI jumped 0.6pc last month as the cost of motor vehicle insurance surged a record 9.3pc. That was the largest gain in the so-called core CPI since January 1991 and followed a 0.2pc rise in June. In the 12 months through July, the core CPI advanced 1.6pc after increasing 1.2pc in June.
Economists polled by Reuters had forecast the CPI would rise 0.3pc in July and the core CPI would gain 0.2pc.
The report followed on the heels of news on Tuesday that producer prices accelerated in July.
With at last 31.3 million people on unemployment benefits, inflation is hardly a threat in the services-oriented economy.
“The biggest input to service sector prices is labour, and when you have more that 30m people claiming unemployment benefits there is likely to be a glut for quite a while,” said James Knightley, chief international economist at ING in New York. “This will keep wage pressure subdued, thus limiting the upside for service sector inflation.”
The Fed tracks the core personal consumption expenditures (PCE) price index for its 2pc inflation target. The core PCE price index rose 0.9pc on a year-on-year basis in June. Economists expect July data, which will be released later this month, will show the core PCE price index rose about 1.4pc.
The US central bank has adopted an extraordinarily easy monetary policy, slashing interest rates to near zero as well as making large-scale asset purchases and funnelling loans to firms among other measures. But the budding recovery from the pandemic is showing signs of stress as new coronavirus infections spiral across the US, forcing authorities in some of the hot spots to either shut down businesses again or pause reopenings.
Job growth slowed significantly in July. The economy, which entered recession in February, suffered its biggest blow since the Great Depression in the second quarter, with gross domestic product dropping at its steepest pace in at least 73 years.