Economic Forecasts

Inflation: Gasoline Prices Drive a Bump

Kiplinger’s latest forecast on inflation

An 8.4% pickup in gasoline prices drove overall prices up 0.4% in December. As a result, inflation ended the year at 1.4%. Gasoline prices have risen further in January, so expect a similar inflation increase to be reported next month as well.

A surge in gasoline prices does not mean that inflation is getting out of hand. It was expected that fuel prices would bounce back as expectations of the economy getting back to normal picked up. In contrast, prices excluding food and energy barely budged in December, rising 0.1% for the month and only 1.6% for the year.

Used-car prices, which had surged earlier last year because of shortages of new cars and strong demand, will likely ease this year. Apparel prices are beginning to show some bounceback after getting hit hard by the pandemic last year.

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 1.9% annual rate, after coming in above 3% for each of the past five years. House prices have been rising strongly, but won’t start causing steeper rent increases until sometime late this year.

Expect overall prices to rise 2.3% 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 also run at about 2.3% 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

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