A Slow and Uneven Recovery Still Likely Despite July’s U.S. Price Bounce

A rebound in prices across travel and leisure categories in July 2020 drove the largest increase in core U.S. inflation since January 1991, with the core Consumer Price Index (CPI) increasing 0.6% month-over-month (m/m). This was enough to boost the year-over-year (y/y) rate to 1.57% as of July, up from 1.19% as of June, despite expectations for a further drop amid the economic challenges posed by COVID-19. The sectors hit hardest by the crisis were the same categories that led prices higher in July. Shelter price inflation also rebounded.

Overall, July’s CPI rebound is encouraging, as it now appears CPI inflation could end 2020 closer to 1.5% y/y. However, after this initial rebound, we expect further price improvements will be slower to materialize and uneven across sectors. Looking further out, inflation is likely to remain well below the Fed’s 2% longer-term inflation target well past 2021, as elevated unemployment and the longer-lasting economic headwinds from this crisis continue to dampen housing services prices. (The Fed’s inflation target is based on personal consumption expenditures, or PCE.)

Travel and leisure prices rose notably

Stronger-than-expected rebounds across travel and leisure categories drove U.S. inflation in July. Price increases across airfares (5.4% m/m), hotels (1.2% m/m), and rental car services (4.0% m/m) – the categories that posted the most severe price declines in April and May – buoyed core services inflation as travel activity continued to pick up slowly from extremely weak levels. High frequency spending indicators (source: Opportunity Insights) still suggest that transportation and entertainment spending are down 48% and 51% y/y, respectively. Similarly, even after July’s stronger-than-expected rebound, hotel prices are still down 13% y/y, while airfares are down 24% y/y.