The overall cost of living remains subdued, with the Consumer Price Index rising 1.4% in January. Over the past six months, the headline inflation rate has remained muted and stands below the Federal Reserve’s 2% implicit target necessary for increased demand and sustainable growth. With an economy still operating at 20% capacity and 9.8 million jobs short of pre-pandemic levels, inflation risks to the overall outlook in the near- to medium-term inflation remain modest.
We expect year-ago base effects linked to movements in the price per barrel of oil to drive topline CPI higher by mid-year and then ease into the end of the year. Thus we expect the top-line metric to temporarily move toward 3.1% by late summer. The Federal Reserve will recognize this for the transitory effect that it is and will not move from its current policy path with respect to zero interest rates or its $120 billion in monthly asset purchases.
For households, the pandemic has resulted in higher prices for home-cooked meals and lower gas prices on account of driving nowhere. The cost of food at home in 2019 rose by an average of 0.9%, compared with 3.7% in January. The cost of motor fuel in 2019 decreased by an average of 3.5%, compared with January’s 8.7% decrease.
We anticipate at-home food prices to continue to revert toward their 2% pre-pandemic average increases as vaccinations rise and the weather grows warmer, presenting households with more dining options. The increase in gasoline inventories as reported by the Department of Energy suggests near-term moderation in gasoline prices, balanced against decreased inventories of crude oil in the medium term.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.