The surprise jump in prices may be a good sign for the economy, and it’s not ‘stoking the fires of inflation’

Mic’Kale Smith Security guard Health Coronavirus USA CNBC | James Alexander Michie

Mic’Kale Smith, who works as a security guard but has had to take time off to care for her son during the coronavirus disease (COVID-19) outbreak, wears a face mask as she shops with her son Da’Mier at the Tiger Market in Oxon Hill, Maryland, May 20, 2020. Jonathan Ernst | Reuters

Consumer prices excluding food and energy rose the most in one month in nearly 30 years in July, but the unexpected increase is seen more as a recovery from the Covid-19 recessionary hit rather than the start of an inflationary spiral.

Core inflation, less food and energy, was up 0.6%, and is now running at a 1.6% rate year over year on an unadjusted basis, according to the Bureau of Labor Statistics. That’s the biggest jump since January 1991, but it is still considered to be a low rate and it is below the Fed’s 2% target.

Headline CPI also increased 0.6% on a seasonally adjusted basis in July, twice as much as expected. Year over year, the consumer price index was up 1% on an unadjusted basis, compared with expectations for just a 0.7% hike.

“I don’t think it’s a worry. It’s not going to be on the Fed’s radar screen. They’re just going to take it as an offset of the months of declines. We fell exactly 0.6% over March, April and May,” said Chris Rupkey, chief financial economist at MUFG Union Bank.

Some investors have been expecting the Fed’s easy money programs and high federal deficits to spur a wave of inflation by next year. Chairman Jerome Powell said after the last meeting that the Fed was more wary of disinflationary pressures.

“Prices are coming back. We’re back to square one,” said Rupkey. “We’re back to seeing where the true trend lies. I don’t think that’s stoking the fires of inflation. … The Fed’s opened the spigot here. We’re doing money printing. I would not take this as a sign inflation is back and the inflation genie has escaped its bottle.”

A 5.6% increase in gasoline prices accounted for about a quarter of the jump in headline inflation, while food prices actually declined by 0.4%, the first drop since April 2019. Gasoline is down 20% year over year, while food prices are up 4.1% on the year.

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Source: Patti Domm | CNBC

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