U.S. consumer prices rose solidly in August, with the cost of used cars and trucks accelerating by the most in more than 51 years likely as Americans shunned public transportation because of fears of contracting COVID-19.
The report from the Labor Department on Friday also showed a firming in underlying inflation last month, putting fears of deflation to rest. Deflation, a decline in the general price level, is harmful during a recession as consumers and businesses may delay purchases in anticipation of lower prices.
Still, stirring inflation is unlikely to discourage the Federal Reserve from pumping more money into the economy to aid the recovery from the COVID-19 recession amid considerable labor market slack. The U.S. central bank in August rewrote its framework, putting new emphasis on the labor market and less on worries about too-high inflation.
“Consumer prices are rebounding from the pandemic shock, but as supply shortages are resolved, upward price increases should moderate,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics in New York. “The Fed’s new policy objectives underscore that monetary policy will remain very accommodative for a considerable time.”
The consumer price index increased 0.4 per cent last month, also lifted by gains in the costs of gasoline, recreation and household furnishings and operations. The CPI advanced 0.6 per cent in both June and July after falling in the prior three months as business closures to slow the spread of the coronavirus depressed demand.
In the 12 months through August, the CPI increased 1.3 per cent after gaining 1.0 per cent in the 12 months through July.
Economists polled by Reuters had forecast the CPI would rise 0.3 per cent in August and climb 1.2 per cent on a year-on-year basis.
Excluding the volatile food and energy components, the CPI gained 0.4 per cent last month after surging 0.6 per cent in July, the largest gain since January 1991. A 5.4 per cent jump in prices of used cars and trucks, the largest gain since March 1969, accounted for more than 40 per cent of the rise in the so-called core CPI last month.
In the 12 months through August, the core CPI climbed 1.7 per cent after rising 1.6 per cent in July.
Though the Fed’s embrace of what it calls “flexible average inflation targeting” is still shy of many details, in theory it could see policymakers tolerate price increases above its 2 per cent target for a period of perhaps several years to offset years in which inflation was lodged below its goal.
Policymakers have expressed a range of ideas about how this might work in practice, but agree the aim is to let prices rise fast enough that household and businesses take their inflation target seriously. The Fed’s preferred inflation measure, the core personal consumption expenditures (PCE) price index rose 1.3 per cent in the 12 months through July. August’s core PCE price index data is scheduled to be released at the end of this month.
Some economists questioned the need for higher inflation as many households were struggling because of the pandemic.
“For the individual worker, rising inflation is not good news, no matter what the Fed thinks,” said Joel Naroff, chief economist at Naroff Economics in Holland, Pennsylvania.
Stocks on Wall Street were trading higher after pulling back in the previous session. The dollar was slightly lower against a basket of currencies. Prices of U.S. Treasuries rose.
BROAD PRICE INCREASES
Though food prices rocketed at the height of the COVID-19 business shutdowns, inflation stayed muted as the pandemic undercut demand for services like healthcare, air travel, dining out and hotel accommodation. High unemployment is also keeping a lid on price pressures despite the Fed’s extraordinarily easy monetary policy and record fiscal stimulus from the government.
Nearly 30 million people are on unemployment benefits.
Last month, gasoline prices rose 2.0 per cent after increasing 5.6 per cent in July. Food prices edged up 0.1 per cent after declining 0.4 per cent in July, the first decrease since April 2019. The cost of food consumed at home fell 0.1 per cent after dropping 1.1 per cent in the prior month.
Consumers paid less for beef as its price dropped 4.4 per cent. But prices of dairy products rose 1.5 per cent. The cost of food consumed away from home rose again.
Housing inflation cooled further amid forbearance agreements between tenants and landlords and a government moratorium on evictions. Owners' equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, nudged up 0.1 per cent. That followed a 0.2 per cent gain in July.
The cost of recreation rebounded 0.7 per cent after falling in June and July. Prices for household furnishings and operations rose 0.9 per cent, the largest increase since February 1991, likely due to more people working from home. Apparel prices rose 0.6 per cent, advancing for a third straight month. The cost of motor vehicle insurance rose 0.5 per cent and prices of airline fares increased 1.2 per cent.
Healthcare costs gained 0.1 per cent after rising 0.4 per cent in July. But prescription medication prices fell 0.2 per cent. New vehicle prices were unchanged. Education costs fell 0.3 per cent, the first decline since the series started in 1993. Many schools and universities have shifted to online classes because of the pandemic.
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This content appears as provided to The Globe by the originating wire service. It has not been edited by Globe staff.