The Bureau of Labor Statistics released July data for both the Producer Price and Consumer Price indices this week. In short, overall inflation is not a problem, helping to keep interest rates low. Consumer prices are up just 1% since July 2019, well below the Federal Reserve’s 2% target. The Producer Price Index (PPI) for final demand goods, which measures production costs, is down 1.9% from the same time last year.
Why is this Good News?
Low inflation and low interest rates will help the economy recover more quickly. Certain economic segments that are sensitive to interest rates are already performing well, including auto and home sales. Low inflation also renders it easier for households to meet their obligations, all things being equal.
Three Key Takeaways
1. Food prices are up 4.1% year-over-year, largely due to an 8.4% increase in meat, poultry, fish, and eggs prices.
2. Energy prices are down 11.2% on a year-over-year basis.
3. The price of hospital services is up 5% since July 2019.
What to Watch
While inflation is contained for now, the combination of economic recovery, money supply growth, and federal deficit spending could ultimately unleash the beast. That probably isn’t the story for the balance of 2020, but it is conceivable that inflation will become more problematic in 2021 and/or 2022, resulting in both a higher cost of living and rising interest rates.