Falling gas prices don’t signal end of inflation woes

David MoonBlog

When gasoline prices dipped about 50 cents a gallon in mid-July, observers speculated (hoped?) that June’s 9.1 percent inflation might signal the peak of rising prices. Possibly. But a reduction in inflation is significantly different than a reduction in prices. Even if inflation falls by half, the annual rate of consumer price increases would still be twice the average annual increase over the past 30 years.

Anyone who is looking forward to a consumer market that returns to anything like that of 2019 is going to be disappointed. The government’s response to Covid resulted in the single largest yearly growth rate in dollars in circulation, combined with a shutdown of production. With such a massive amount of liquidity chasing fewer available products, prices adjusted accordingly.

Many consumer prices are permanently reset at these higher levels. Of those prices that do eventually decline from here, most will never return to pre-pandemic levels. I suspect real estate will be included in this category.

Increases in real estate prices and rents will subside, but don’t wait for prices to return to pre-pandemic levels. Home prices will likely eventually decline in the hottest areas in the U.S., but it is likely that the general level of real estate prices has reset at a new normal.

Twelve years of artificially low rates manipulated by the Federal Reserve have skewed expectations, but even following a 2.5 percentage point increase this year, mortgage rates are still extremely low.

Energy prices, especially gasoline, get all the media attention, which makes sense, given that gasoline accounts for seven percent of household spending – which is lower than I would have expected. Gasoline is one category of expenses where prices will eventually decline – and perhaps significantly so. This will relieve household budget pressure directly and indirectly, because of the embedded oil component of so many products.

There are plenty of CPI categories that will likely never decrease in price. The hyperinflation of the past two years has set a new baseline for these items. These items likely include clothing (up 5.2 percent in the past year), medical care service (up 4.8 percent), electricity (up 13.7 percent) and food (up 10.4 percent.) The price increases of these items will eventually slow, but don’t expect recent increases to reverse.

I don’t have a strong opinion about future automobile prices; there are so many dynamics at play in that market, including production capacity for new vehicles and assembly components, used car availability and pricing and the effect of higher financing costs on demand.

Even if the June CPI was the peak for this cycle, a slowing of consumer price increases does not signal a return to any recent status quo.

David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.