At first, it seemed there was not much to be said about prices...
The BLS released Consumer Price Index (CPI) data and to no one's surprise (unlike the unemployment data last week!), the CPI reflected what usually happens in a recession- it went down .1% in May, the third straight week. In April, the decline was .8%, the largest one since the Great Recession in 2008. Also, not surprisingly, subdued demand-- both due to stores being shut and lower purchasing power-- is responsible for this downward pressure on prices.
There is a bit more room for imagination when we look into the future. Some observers warn of the opposite problem-- inflation. The Treasury and Federal Reserve have pumped in an extraordinary amount of money into the economy, so this could eventually lead to higher price levels. At this point, though, it difficult to prognosticate if, how, when and which of the two countering forces--dampened demand versus stimulative policies-- will prevail.
So.....🤷
But then I started looking beyond just the big aggregate headline number, and prices got a lot more interesting. While overall, the price of the "basket of goods" that the CPI tracks went down, this was not the case for its components. Take food. In May, food prices rose 4.8%. Over the past three months, they’ve risen 4.1% — that’s an annual rate of 17.5%. Beef prices are up 11% in just three months. The CPI for Meats, poultry, and fish increased 3.9 percent from March 2020 to April 2020 and is up 6.2 percent since April 2019. Here, supply factors-- closures of meat processing facilities-- were responsible. Prices of staples like carrots and potatoes also increased due to transportation and health issues among workers. There is a sense that the higher prices are here to stay.
For the average household in the economy, on a day-to-day basis, this increase in food prices is perhaps more relavent than the CPI as a whole. As household income goes down, the fraction of food expenditure goes up-- poorer households spend a larger fraction of their income on food. So higher prices hits where it really hurts. This Opinion piece expresses frustrations over the increasing prices of necessities even while prices in other categories are falling:
Most of us can put off buying clothes for a few months. Most of us have drastically cut back on our transportation spending since the coronavirus hit — there’s no place we want to go. And many people are spending less on health care because, frankly, they are afraid to go to the clinic while this nasty virus is still spreading. But all us have to eat every day or so. And we have to pay the rent and other bills.The absolute necessities are getting more expensive, while the things we can forgo are cheaper.
