Gasoline Prices Solely Responsible for Inflation in January
Kiplinger’s latest forecast on inflation
A 7.4% pickup in gasoline prices drove overall prices up 0.3% in January, despite flat average prices elsewhere. This follows a 5.2% rise in December. Gasoline prices have risen a bit more in February, so far.
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 were flat in January. Overall, prices are 1.4% higher than they were twelve months ago.
Used-car prices dropped for the third month in a row. They had surged during the pandemic because of shortages of new cars and strong demand, and will likely continue to ease this year. Apparel prices are showing some bounceback after getting hit hard by the pandemic last year. Air fares declined for the second month in a row.
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 1.6% 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 2.2% 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 2.2% 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.
