As Gas Prices Drop, There’s Finally Some Encouraging News on Inflation

Over the past year or so, the notion that inflation is out of control has taken firm hold among Americans, and it’s not hard to see why. In the twelve months to July, the gasoline price was up 44 percent, the cost of fuel was up 75.6 percent, and the price of groceries was up 13.1 percent. Finally, though, struggling households are getting some relief.

After reaching $5.10 a couple of months ago, the average price of a gallon of regular gas across the country has fallen to $3.99, according to AAA After dipping another penny on Wednesday, prices have now dropped for fifty-eight days in a row, reflecting a considerable drop. in the price of crude oil on world markets. The cost of fuel oil also fell sharply last month, as did the price of some other items that had previously seen big price increases, such as airfares and hotel stays. Consequently, the overall rate of inflation, as measured by the Consumer Price Index, fell from 9.1 percent in June to 8.5 percent in July, according to the Labor Department, which released its latest report on Wednesday.

These figures refer to price increases over the last twelve months and obviously a rate of 8.5 per cent is still unacceptably high. But these numbers do not adequately convey the unexpected nature of what has happened more recently. In July, general prices did not increase at all. Whether you look at unadjusted or seasonally adjusted prices, the CPI was flat as falling energy prices offset further increases in rents and food costs. In other words, inflation took a month off. This was the first time since May 2020, during the pandemic lockdowns, that the CPI did not rise, and it was an outcome that few economists predicted.

Once again our post-lockdown crazy economy has surprised experts, and there was more encouraging news on Thursday, when the Labor Department reported that the Producer Price Index, which covers the prices companies pay for their supplies, fell 0.5 percent in July, the biggest drop in more than two years. Like the flat CPI figure, the drop in the PPI was largely due to falling energy prices, but what’s happening in the energy sector isn’t the only sign that inflation pressures are finally easing. a little.

Last month, the so-called core CPI, which excludes food and energy prices, rose 0.3 percent, compared with a 0.7 percent jump in the previous month. This slowdown reflected price declines in some areas that had previously seen large increases, such as the travel sector. Airfares fell 7.8 percent, the price of car and truck rentals fell 9.5 percent, and the cost of hotel rooms fell 3.2 percent. The price of many durable goods, such as computers and sports equipment, also fell slightly, suggesting that at least some of the global supply chain problems that have pushed up prices in the past two years are finally being ironed out.

On the other side of the ledger, rents rose another 0.7 percent; the price of new vehicles, which are still in short supply, increased 0.6 percent; and the cost of groceries rose another 1.3 percent, and bread prices rose 2.8 percent. The fact that food prices have continued to rise is particularly striking, because, in the last two months, many of the factors to which this phenomenon has been attributed have reversed. Energy prices and transportation costs have fallen. So have the prices of many agricultural commodities, including wheat, soybeans and sugar. However, food producers such as Kraft Heinz and Mondelez continue to raise their prices.

One interpretation of this disconnect is that it always takes time for changes in raw material prices to translate into the price of finished goods. A less benign interpretation is that the big food companies are increasing their profits. In any case, however, a sustained drop in commodity prices should eventually lead to lower food prices, a development that would be welcomed by consumers. If this drop is accompanied by further drops in energy prices, the headline rate of inflation will almost certainly fall much further. According to investment bank Jefferies, the drop in gasoline prices since the end of July could reduce August’s CPI by 0.6 percent. By the end of the year, the headline inflation rate could be in the “low seven or high six,” Gregory Daco, chief economist at EY-Parthenon, told me, while the core rate, which the Fed monitors closely, could be in the “low five or high four”.

In other words, there is little prospect of inflation returning to the Federal Reserve’s target of two percent any time soon. what about if He war in ukraine intensifies, causing another spike in oil prices, or a deadlier new variant of the coronavirus emerges and causes more global lockdowns, the recent decline may be reversed. But barring a calamity on that scale, US inflation seems to have peaked. “Commodity price pressures, supply chain issues and the reopening (of travel) are fading,” Aneta Markowska and Thomas Simons of Jefferies wrote in a circular for clients. “Labor costs continue to be an issue, and we still think they will put a floor on inflation at around 4%, but that won’t be apparent until next year.”

An inflation rate of four or five percent would have very different consequences than a rate of nine or ten percent. History shows that when very large price increases are sustained for a prolonged period, people adjust their behavior, including their wage demands, accordingly. This is what can lead to a 1970s-style spiral of wages and prices. But if inflation falls further, people’s expectations of future price increases will also decline. In fact, this is already happening. One-year and three-year average inflation expectations fell sharply in July, from 6.8% and 3.6% in June to 6.2% and 3.2%, respectively. York this week.

“We are certainly not in a wage-price spiral,” Daco said. “I don’t see that in the numbers or in my conversations with business leaders.” That is another reassuring element of the current situation. Although last year’s big spike in inflation is not over, the outlook is gradually improving. ♦

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