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US Inflation Moderates In August – Analysis

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One-time declines held down inflation in August but will likely get back to around a 2.5 percent rate in the core. When supply constraints relax, lower car prices will dampen inflation. Rents remain a huge question mark with the end of the eviction moratorium possibly being a big factor.

The overall CPI was up just 0.3 percent in August; core inflation fell to just 0.1 percent, up 5.3 percent and 4.0 percent year-over-year, respectively.

Used car prices dropped by 1.5 percent, but new car prices are still rising: 1.2 percent in August, 7.6 percent year-over-year. The story on new car prices is actually good news on the longer term inflation outlook. We will get through supply constraints at some point, and these price gains are likely to reverse.

Both food at home and restaurant food prices rose 0.4 percent in August, up 3.0 and 4.7 percent year-over-year, respectively. Food prices will likely continue to outstrip overall inflation due to climate issues weakening crop yields. Restaurant inflation usually exceeds food inflation by roughly 1.0 percentage point, but a greater gap is now likely due to wage pressures.

Big drops in airfares, car insurance, and hotel prices lowered the August CPI by 0.08, 0.06, and 0.04 percentage points, respectively. These pandemic-related drops will likely be reversed in the next few months. Hotel prices are 5.0 percent above the February 2020 level, and are not likely to rise rapidly as the pandemic eases. Airfares are 17.9 percent below their pre-pandemic level, and are likely to rise further.

Both rent proper and owners’ equivalent rent rose 0.3 percent in August, up 2.1 percent and 2.6 percent year-over-year, respectively. Ending the eviction moratorium will likely put downward pressure on rents this fall.

The northeast is seeing markedly lower inflation than the rest of the country at just 4.4 percent year-over-year and 3.9 percent in major cities in the region. The highest inflation is in the Midwest at 5.7 percent, year-over-year and 6.0 percent in smaller cities. This fits the story of people moving from high-cost cities to low-priced smaller ones (for remote work).

The medical care index was up 0.2 percent in August, just 0.4 percent year-over-year.

The education index was flat in August, up 1.4 percent year-over-year. Colleges are likely feeling pressure to keep tuition down with more remote learning.

This column originally appeared on Dean Baker’s Beat the Press blog.

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Dean Baker

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.

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