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Economic Forecasts

Low Inflation to Continue for a While

Kiplinger’s latest forecast on inflation

Prices declined 0.1 percent, on average, in May, mostly because of a continued drop in energy prices. This is the third month in a row that prices have declined, though a pickup in economic activity this month suggests that June average prices will be higher.

The lower prices, triggered by reduced economic activity due to the coronavirus pandemic, will likely continue for a while. The biggest decline from a year ago last May was the 33.8% drop in gasoline prices as driving dropped off. Now that it has started to rebound, pump prices have picked up in June. Prices are still down between 15% and 30% from a year ago for formalwear like women's dresses and men's suits, hotel rates, airfares, car rentals and car insurance.

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On the other hand, the virus has driven up prices of groceries. Outbreaks at meat processing plants raised the price of beef by 18.2% from a year ago, and other meats about 8%. Eggs and beans are seen as alternatives to meat, and their prices are up 13.5% and 8.6%, respectively. Prices of other basics such as dairy, pasta and paper products are up more than 5%.

The price of medical services is up 5.9%, but this started before the virus. It has mostly been driven by rising health insurance costs (up 19.7%) and hospital charges (up 4.9%). Prices for admission to sporting events have risen as capacity has been cut, because of social distancing measures.

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Housing prices may jump in the second half of the year as low mortgage rates cause demand for homes to surge in the face of low inventory.

The inflation rate should end the year at 0.3%, far below last year’s 2.3%. Core inflation, which excludes the costs of food and energy, will continue to run higher than the headline rate, at about 1.1% over the course of this year.

A note about data reliability: An issue that government data collectors face is that at the moment, they cannot go into stores that are shut down and collect price data. Therefore, the reliability of some of the numbers may be suspect, though the Bureau of Labor Statistics managed to obtain three-fourths of their normal price quotes online and through other means. The BLS also has statistical procedures in place to keep missing data from biasing the overall numbers.

Source: Department of Labor, Inflation Data

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