Inflation may be on many investors’ minds, but it has yet to show up in the numbers. Moreover, a close reading of the data suggests that inflation won’t be a problem for some time, if ever.
The latest reading of the consumer price index shows that Americans’ cost of living was only 1.7% higher in February 2021 than a year earlier. That’s the fastest inflation reading since the pandemic began, but still substantially slower than the pre-pandemic average. Exclude volatile food and energy prices, and inflation is running at 1.3% a year.
Even that figure overstates the situation, because it incorporates some one-off price spikes of essential goods earlier in the pandemic. Since October, core consumer prices have increased at a yearly rate of just 1.1%, or about half the pre-pandemic inflation rate.
What’s really interesting, though, are the details under the numbers. While the pandemic led to price spikes for certain items, it depressed demand for many others. Crucially, the one-off price spikes are already fading into the past, which means the outlook for future inflation will depend on whether inflation in the other categories picks up. So far, the data suggest that’s not happening—despite the reopening of the economy as vaccinations accelerate.
Start by looking at the categories that saw the biggest price increases earlier in the year: used cars and trucks, major appliances, and household cleaning products. Until the pandemic, the prices of all of these items spent the past several years, if not decades, either flat or falling. But a surge in demand—either because of the perceived health benefits or because of unprecedented levels of government cash payments to consumers—pushed up prices by double-digit percentage gains.
Tellingly, however, those prices have either stopped rising, or have begun to fall. While used-vehicle prices had jumped 14% between February and October as many consumers switched away from public transit to driving, preowned-vehicle prices have since dropped by 4%. For perspective, prices for used vehicles only rose at a faster pace four previous times: in early 2010, in 1981, in 1975-76, and in 1961.
Similarly, the prices of major appliances surged 16% between February and November. Many people who had been thinking about upgrading their living situation were suddenly flush with cash thanks to the combination of federal income support and closed services businesses, and they spent accordingly—before producers had a chance to ramp up supply. But prices have drifted lower since then as consumers sated their demand and as manufacturers boosted capacity. The prices of cleaning supplies jumped in response to concerns about the spread of the virus itself, but have begun to decline alongside the rate of new infections.
The price changes in these three categories have been dramatic, but their weight in the overall consumer price index isn’t that large. Together, they account for 4% of the core CPI. By comparison, housing, medical care, and education together account for more than half of the core index. So it’s worth noting that these major categories have been experiencing significant slowdowns in inflation since the pandemic began.
Rental price increases have slowed from a steady prepandemic average of almost 4% a year to just 2% as of February. Moreover, the rate is continuing to decelerate. While some of this could be attributed to the eviction moratoria that are keeping delinquent renters in their homes, the slowdown is consistent with previous decelerations in rental inflation that coincided with economic downturns.
Then there is the price of college. While inflation of tuition and fees was as fast as 10% a year in the mid-2000s, the rate of price increases has been steadily slowing for some time. During the pandemic, prices fell outright, such that the yearly rate of inflation in February was just 0.4%. While prices may end up rebounding somewhat as students return to campuses, the disinflationary trend should probably continue.
Since August, the price of healthcare services has increased at a yearly rate of just 0.8%. Some of that is due to an annualized 10% decline in the cost of health insurance, but the inflation rates of hospital services, dentists, and nursing homes have also been stable or slowing compared to before the pandemic.
The prices of doctors’ visits had also been rising at a sluggish pace, although inflation in physician services has spiked up in the past two months. That’s probably a one-off fluke rather than the start of an accelerating trend, but it’s nevertheless accounted for half of the total monthly increase in the core CPI in February. Exclude it, and the annualized rate of overall core inflation since October was just 0.9%.
Finally, consider the outlook for services that may experience a surge in demand once vaccinations lead to a return to normalcy. Airfares, for example, are still about 26% lower than before the pandemic. Presumably, those prices will rebound at some point, leading to a temporary pop in a category accounting for about 0.6% of the total index that should help offset likely declines in the prices of appliances, cleaning supplies, and other items that faced surge pricing.
But it’s more telling that the prices of “full service meals and snacks” are exactly on track with the prepandemic trend, even though prices fell in the initial months of the pandemic.
Anecdotally, this makes perfect sense. The demand for indoor dining may be down, but many restaurants—at least the ones that don’t depend on office workers as customers—are nevertheless doing a brisk business thanks to the combination of outdoor dining and takeout or delivery. They’ve had no incentive or reason to cut prices. One implication is that a return to normalcy probably won’t lead to a huge uptick in either total demand or consumer costs, because many diners will simply switch from getting their food to go to sitting down inside. And since restaurants can serve more people more efficiently when they’re inside rather than outside, it shouldn’t be that hard for eateries to accommodate the shift in demand.
It’s certainly possible that these underlying trends could change, and that inflation could end up accelerating beyond a reasonable threshold. But that would require a particular combination of circumstances that so far don’t seem to be in the cards. Meanwhile, businesses have shown an impressive ability to expand supply to meet demand—and the data so far suggests they can probably continue to do so.
Write to Matthew C. Klein at matthew.klein@barrons.com
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March 11, 2021 at 08:30PM
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Inflation Isn't Happening, and It Likely Won't. Here Are 7 Charts Showing This. - Barron's
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