You’ve gone grocery shopping, ordered in from your favorite local restaurant, filled up your gas tank, and maybe even gone car shopping or house-hunting. So, are prices going up or down? The answer is “yes.” According to Brian Wesbury, Chief Economist at First Trust, Covid-19 continues to bring volatility to producer prices, as both goods and services industries adapt to supply chain disruptions. Expectations were for a 0.4% increase in producer prices, but instead, a 1.8% decline in trade services more than offset rising costs for goods.
The typically volatile food and energy categories lived up to their reputations, with food prices declining 5.2% (essentially reversing the jump in May when meat processing plant shutdowns limited supply) while energy prices rose 7.7% on the back of higher gasoline costs. Strip out these volatile categories, and “core” producer prices declined 0.3% in June. Core producer prices are essentially flat over the past twelve months. Expect disruptions related to COVID-19 to continue to muddy the data over the coming months, with excess volatility in no short supply.
Once the dust finally settles – and it eventually will – we expect inflation to trend back toward 2% and then higher. The Federal Reserve is loose and, as it has made abundantly clear, plans to stay that way for the foreseeable future. Meanwhile, a combination of businesses operating at limited capacity and unusually generous unemployment benefits remain a headwind to economic activity. The result will eventually be too much money chasing too few goods, meaning higher – but not likely hyperinflation.
Written by: Andrew T. Gardener, CFP®