In April, core inflation in the US posted the largest monthly decline on record, even as grocery bills surged the most in 46 years.
The contrast was emblematic of the pandemic’s Harvey Dent character – the biggest demand shock in at least a century is a deflationary supernova by definition, but the virus was also a supply shock in many respects, and that side of COVID manifested in, for example, rising beef prices.
Fast forward a month, and the numbers for May show both headline and core decelerating further YoY, with the latter rising just 1.2%, the smallest increase in nearly a decade.
The headline gauge rose a mere 0.1% from the prior year.
The MoM print for core CPI was -0.1%. The market was looking for a flat reading. May’s drop means the gauge has fallen for three consecutive months – that has never happened previously.
Once again, indexes for apparel, gas, and transportation services fell, while food at home prices rose 1%, far less than April’s record 2.6% increase, but still indicative of higher grocery bills.
The BLS notes that the gain in food indices was driven mostly by rising prices for meat, poultry, fish and eggs. The beef index rose nearly 11% in May – that’s a record.
As a reminder, the deflationary impact of COVID has been overwhelmed in some surveys of consumer expectations by the inflationary side of the virus.
This is attributable to the fact that Americans simply weren’t engaging in economic activity in the areas where prices have plunged. By contrast, it’s hard to avoid eating for two months.
Nowhere is this disparity more apparent than the hilarious disconnect between the Fed’s preferred gauge and University of Michigan expectations for prices next year.
The following chart speaks for itself, even as nobody knows exactly what it’s trying to say right now.
Read more:
Why Morgan Stanley Sees ‘The Return Of Inflation’ After Coronavirus Crisis
Normally I roll my eyes at these confidence surveys. But in this case they probably do make sense, for the reasons you alluded to.
But once the food component blows through, how will lodging and education prices impact the indices?