Consumer Prices Fall Again, CPI Shows, as Coronavirus Reduces the Rate of Inflation to Near Zero

Consumers are paying much less for meat, seafood, and cereals, as the sharp drop in the price of meat and cereals continues. CPI fell 1.1% in May after rising 2.5% in April, the first positive reading for the indicator since the beginning of the year.

On one front, consumer prices have reached a plateau, now extending to several categories. On the other, these declines in food prices are dragging down the rate of inflation.

Below is a chart showing the most recent monthly CPI data since 2013. The period starting in March 2014 serves as the benchmark for the chart. It will take several months to see if the once persistent headline number goes above zero, or remains near zero. The lower level of inflation corresponds to a renewed economic weakness, as it came in light of weaker activity over the winter.

Bread and cereal prices have declined steadily since early 2017, down to their lowest level since March 2015. Egg prices are down 6.8% over the same period, in large part due to a shortage caused by the mild winter leading to a record number of laying hens in the United States. Chicken and pork prices have also declined since their peaks in November 2017.

At the same time, non-food prices have stagnated, rising just 0.1% in May. Prices for energy, which have weighed heavily on inflation in recent years, increased 0.5% in May, due to higher energy prices. Core inflation, which excludes energy and food costs, rose 0.2% in May and 1.7% on the year.

Is CPI going positive? Some commentators are finding reason to consider a positive reading in inflation. But it’s too early to tell yet, and there are a lot of factors in play. Although core inflation remains near 1%, the drop in food prices and an upward shift in the government’s estimate of utility costs from last month has lowered the rate of inflation.

In April, the government raised its estimate of electricity and natural gas service charges in April by about 0.2%, taking the price index up by 0.1% and preventing the headline inflation rate from going into negative territory.

There is also a positive component in the latest data. On a month-to-month basis, June will see the effect of higher petrol prices associated with the end of the 12-month spring driving season, as well as higher prices for food and gas. The specter of a Saudi-led coalition bombing Qatar and the threat of a trade war with China have also caused the dollar to strengthen, which might have caused some additional weakness in prices.

Overall, it could take a while to confirm whether inflation is heading back toward its 2% target. Note that the American economy seems capable of expanding more rapidly, if desired, and that still more growth will bring inflation. In the meantime, consumers will be grappling with lower food prices for the foreseeable future.

Related posts

Leave a Comment