May 10, 2021
(The monthly Consumer Price Index (CPI) is scheduled for release by the Bureau of Labor Statistics on Wednesday, May 12th at 8:30 AM Eastern Time.)
In April, we should be watching for a bounce back in the prices of many areas where we saw price declines due to the pandemic. This list will include restaurants, hotels, airfares, and auto insurance. The price of auto insurance fell sharply during the height of the pandemic because the CPI uses a gross payments measure which doesn’t deduct payouts for accidents. (This is the opposite of medical insurance where the measure is net of payments for services.) Less driving meant fewer accidents, which meant insurers could give large rebates and still maintain profit margins.
When making longer term comparisons, it will be important to use February of 2020 as the basis, not the year-ago level, which included large pandemic-induced price declines.
Used cars are likely also to show a large price jump. With new cars in limited supply, the demand for used cars has risen sharply. This shortage will be temporary but will be a factor in the core inflation data.
Two areas to look to for hints on the longer-term picture are rent and medical care. Rental inflation had fallen sharply from roughly 3.5 percent before the pandemic to under 2.0 percent in recent months. If it remains low, it will reduce the risks of an inflationary spiral.
The rate of inflation in medical care had slowed sharply in the recession. It seems to have picked up some in the last couple of months. This will be an important factor in inflation going forward. It’s worth noting that the weight of medical care in the Consumer Price Expenditure deflator, targeted by the Fed, is more than twice as large as its weight in the CPI.
It’s also worth mentioning the 4.5 percent productivity growth figure reported for the first quarter last week. While the quarterly data are highly erratic, this continues the more rapid growth rate seen in 2020. If productivity growth stays in the neighborhood of 2.0 percent, or higher, inflation is unlikely to be a problem.
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