January 12, 2021
The resurgence of the pandemic had a major impact on the economy last month, as we saw in the December jobs report. This means that we are likely to see some of the pandemic-specific price effects that occurred in the spring, although they will not be as pronounced, since the December hit was nowhere near as large as the impact of the spring shutdowns.
Most obviously, we are seeing more store-bought food and fewer restaurant meals. In the spring, this led to a sharp rise in the price of store-bought food, while restaurant prices fell. The usual pattern is that restaurant prices rise by around 1.0 percentage points more than the price of store-bought food. This shutdown effect was largely reversed when the economy began to reopen in the summer. As of November, the price of store-bought food was up 3.7 percent from its year-ago level, while the price of restaurant food was up 3.8 percent.
In the same vein, hotel prices fell sharply in the spring months. As the economy began to recover in the summer, they rose modestly, but as of November, they were 10.9 percent below their year-ago level. It is likely the spread of the pandemic has weakened demand somewhat, but given the erratic pattern of hotel prices even in normal times, this may not be reflected in a drop in the index.
The rate of rental inflation has slowed sharply with the recession. Rent proper had been rising at a bit less than a 4.0 percent annual rate prior to the pandemic. This has slowed to an annual rate of less than 2.0 percent in recent months. Rental inflation generally has considerable momentum, since most tenants have leases that limit the extent to which rent can be adjusted month to month. Therefore, this sharp slowing is especially striking. There has been a similar slowing in the index for owners’ equivalent rent.
Apparel prices also fell sharply in the spring, and then rose modestly in the summer. The index was 5.2 percent below the year-ago level in November. There may again be a modest fall in December, but the erratic movements in the index can swamp the pandemic effect.
Airfares plunged with the shutdown, with some increases as the economy reopened. However, the index was still 17.0 percent below its year-ago level in November. The spread of the pandemic actually has not slowed air travel further, as the Christmas season saw the highest traffic since the onset of the pandemic. This likely means modest increases in December.
Auto insurance premiums fell sharply during the shutdown months as insurers gave rebates to people who were driving much less. There was some reversal in the summer months, but prices fell again in September and October. They are now down by 6.0 percent from year-ago levels. The monthly data with auto insurance are always erratic, but it would be surprising to see a large increase with people presumably driving somewhat less in December.
The price of new cars has risen modestly in the pandemic months, as demand has remained strong. They are up 1.6 percent over the last year. However, used car prices have risen far more rapidly, due to large price rises in the summer months. They subsequently fell sharply in September and October, but are still up 10.9 percent over the last year. This index is highly erratic, but we will likely see a further decline in December.
Medical care costs have also slowed sharply and actually fell in both October and November. The index is now up just 2.4 percent over the last year. It is likely that we will see another month of modest inflation in December.
College tuition inflation had slowed even before the pandemic, but we actually saw three months of price declines from August to October. The index is now up just 0.6 percent from its year-ago level in November. It is likely to be flat or show a small negative in December.
On the whole, inflation has been very well contained in the downturn, with little near-term prospect of accelerating. This is a very good story for two reasons. First, it means that there is little reason for concern that a recovery package passed by Congress will be so large as to trigger serious problems with inflation.
The other reason this is positive is that low inflation means workers’ wages are going farther. With average hourly wages up 5.1 percent over the last year (partly due to the loss of low-paying jobs) and inflation up by just 1.2 percent, the workers who have kept their jobs are seeing very healthy real wage gains.