Gasoline prices jumped 6.6% in February and drove overall prices up 0.4% for the month. And gasoline prices are headed up in March as well, which would be the fourth consecutive large monthly increase.
The surge in gasoline prices does not mean that inflation is getting out of hand. It was expected that fuel prices would bounce back as the economy gets back to normal. Gasoline prices in mid-March were still below 2019’s peak level.
In contrast to gasoline, prices excluding food and energy edged up only modestly in February. Overall, prices are 1.7% higher than they were twelve months ago.
Used-car prices dropped for the fourth month in a row. They had surged during the pandemic because of shortages of new cars and strong demand. The new government stimulus checks of $1,400 to individuals will likely push up demand for vehicles again, reversing the downward price trend for a while.
Air fares dropped for the third month in a row in February, but this trend is expected to reverse as the current easing of the pandemic is likely to boost travel.
Medical costs are beginning to bounce back after being depressed last year. Costs should end the year up 4.4%, on average.
The cost of shelter is running lower than normal right now because rent increases have been slowed by the pandemic. Rent has been rising at only a 1.5% annual rate, after coming in above 3% for each of the past five years. House prices have been rising strongly, but these are not included in the consumer price index calculation, and won’t start causing steeper rent increases until sometime late this year.
Expect overall prices to rise 2.5% in 2021 as the pandemic recedes. Inflation ended 2020 at 1.4%, far below 2019’s 2.3%, but as the pandemic ends, some prices that had been depressed will start to reassert themselves, such as apartment rents, air fares and hotel rates. Core inflation, which excludes the costs of food and energy, will run at about 2.0% in 2021, up from 1.6% at the end of 2020. The Federal Reserve will recognize that this pickup in inflation is the result of temporary factors, and will not be tempted to raise short-term interest rates in order to tamp it down.
Print-ready Consumer Price Index chart
Source: kiplinger.com