By Dean Baker
Both the core and overall Consumer Price Index (CPI) dropped 0.1 percent in May. It was the third consecutive month of decline for both indexes. The overall CPI has fallen 1.3 percent over the three months since the pandemic began to have a major economic impact, while the core index has dropped 0.6 percent.
The pandemic has had sharply divergent impacts, as would be expected. The price of food purchased in stores rose 1.0 percent in May, while restaurant prices only rose 0.4 percent. Over the last three months, the price of store-bought food has risen 4.1 percent, while restaurant prices have risen just 0.7 percent. Before the pandemic, restaurant prices were increasing 1-2 percentage points more rapidly than the price of store-bought food largely due to rising wages for restaurant workers.
Hotel prices and airfares continued to plummet in May, dropping 1.8 percent and 4.9 percent, respectively. Hotel prices have fallen 16.7 percent over the last three months, while airfares are down by 29.5 percent. Apparel prices have also plummeted due to the pandemic, as people have hugely cut back their clothes purchases. Apparel prices fell 2.3 percent for the month and are down 8.8 percent since February.
Gas prices were reported as again dropping in May, falling another 3.5 percent. They are now down 31.5 percent for the last three months. This drop will almost begin to be reversed in the June data, as world oil prices have substantially recovered from the lows hit in April and many measures show gasoline prices rising.
Auto insurance prices fell 8.9 percent in May, after dropping 7.2 percent in April. These declines reflect rebates that most insurers are giving customers due to the fact that accidents have sharply fallen as a result of less driving during the shutdowns. Auto insurance has a large weight in the CPI, accounting for 1.6 percent of the overall index and almost 2.0 percent of the core index. This is because the CPI uses a gross measure of insurance payments, rather than netting out the settlements paid to customers. It uses the opposite approach with health care insurance, where the index only measures administrative costs and profits, netting out the payments to providers.
Health care insurance prices continued to rise rapidly in May, increasing 1.1 percent. They are now up 19.7 percent over the last year. The price of health care services more generally rose by 0.6 percent in May. They have risen by 1.6 percent over the last three months.
There is no clear evidence of any changes in the pace of rental inflation, with both the rent proper and owners’ equivalent rent index rising 0.3 percent in May. Over the last year, they are up by 3.5 percent and 3.1 percent, respectively.
New vehicle prices rose 0.3 percent in May, after being flat in April. They are down 0.3 percent over the last year. The May increase is likely the result of buyers coming back into the market with the shutdown ending and low inventories due to factory shutdowns.
It is likely that we will see a similar reversal in other sectors as people resume something closer to normal consumption patterns and many suppliers have to deal with both shortages and higher costs due to necessary safety precautions. This is likely to be especially true in sectors like restaurants and airlines, where it will not be possible to operate near prior capacity levels and additional expenditures will be needed to ensure customer safety.
The May CPI will likely be the last one showing large pandemic-related price declines. Many of the sectors that showed the sharpest declines, such as gasoline, airfares, and apparel, are likely to show rises in June and the rest of the summer. This is not likely to be a basis for sustained inflation since it will mostly be a bounce back and one-time adjustments to higher pandemic-related costs. However, the May report should give us confidence we don’t have to worry about a deflationary spiral, in case anyone had such concerns.