Prices for used cars and trucks jumped 10% between March and April, the biggest increase in nearly 70 years. Airline and hotel prices have increased accordingly. And consumers paid a lot more for computers, shoes, furniture, sports equipment, and a host of other goods and services.
Inflation is back, after decades in which consumer prices barely rose and economists worried about the dangers of deflation and the economic stagnation it can bring.
The big question now is whether the current price spikes are temporary or are harbingers of serious problems to come.
One possibility is that the U.S. economy and workforce, after being deeply rocked by the COVID-19 pandemic, are experiencing the ups and downs of returning to normal.
The other possibility, that the economic shocks of the pandemic triggered deeply entrenched inflationary forces, is far more serious. This would put pressure on the Federal Reserve to push on the economic brakes and President Biden to put the brakes on his spending plans even if unemployment remains high and thousands of businesses are still struggling to survive.
Most economists agree that inflation concerns, at least for now, are overblown. This is in part because the monthly consumer price reading is compared to last year’s level, when prices were unusually depressed due to the collapse in demand resulting from lockdowns and door-to-door orders. The final months of year-to-year comparisons will not have such significant distorting effects.
Leo Feler, a UCLA economist who prepares the inflation section of Anderson’s forecast, said home food prices, which rose in April, should start to return as people come out more. And as supply constraints and bottlenecks dissipate, other inflationary pressures will ease as well.
Still, some economists have been warning for some time about the risks of soaring inflation, and those fears have escalated and sparked a second day of massive selling on Wall Street after the government report on Wednesday that consumer prices rose 4.2% in April from a year ago. earlier.
This is the highest jump since September 2008 and well above analysts’ forecasts.
Economists say what happens with futures prices will be determined by inflation expectations and the downturn in the economy, especially in the workforce.
The price rebound can come as a shock to a current generation that has seen next to nothing in terms of significant inflation, with a few exceptions like the occasional spikes in gasoline and food prices.
“Few consumers think the latest bout of inflation is temporary. They see the prices of everything from computer chips to popping chicken wings, ”said Sung Won Sohn, professor of finance and economics at Loyola Marymount University.
“In view of the tightening of the labor market, labor costs, which represent at least two-thirds of the [consumer price index], will take off, resulting in higher wages and inflation expectations, ”Sohn said.
In addition, price increases are not easily lowered; they tend to stick. And last month, about 36% of small businesses polled by the National Federation of Independent Businesses said they had increased their selling prices, the highest share in 40 years.
Natasha Amott, who operates a kitchenware retail store in downtown Brooklyn called Whisk, said she had no choice but to raise prices, especially on products in steel such as baking tins, cookie sheets and skewers. It said half of its 200 suppliers had already announced price increases or by the summer, many of which were 5% or more.
“Absolutely no way to eat it all,” Amott said of the price increases, adding that she’s also paying more in freight. “For the vast majority of products, consumers will see a dime here, a quarter there, sometimes a dollar going up.”
Over the past few weeks, Amott has been preparing its employees on how to respond to sticker complaints.
The current trend is a radical departure from the past decade, when annual inflation was below the Federal Reserve’s 2% target. Consumer prices only rose 1.25% last year, as COVID-19 forced much of the economy to crash.
But this spring brought a perfect storm for price pressure: a rapid economic recovery fueled by increased vaccinations, massive federal spending, a huge pool of savings, pent-up demand, and largely unrelated shortages of semiconductors. , lumber and other commodities.
Added to these pressures are transportation delays and other supply chain bottlenecks. Used car prices, for example, have increased as a shortage of chips has slowed the production of new cars despite strong consumer demand. The Suez Canal blocked in March tied up millions of dollars in global trade.
Wednesday’s data came on top of Friday’s startling jobs report, showing much weaker-than-expected job growth, in part because companies couldn’t fill open positions. If maintained, a labor shortage could lead to wage increases and a further surge in inflation.
Fed Vice President Richard Clarida reiterated in a speech Wednesday the central bank’s view that the rise in inflation will prove to be “transient” and that by next year it should revert to the Fed’s target of 2% or a little above, suggesting that policymakers were not deviating from their plan not to hike interest rates until 2023.
Fed Chairman Jerome H. Powell and his colleagues have pledged to keep rates low as they focus on achieving their goal of a full and broad recovery in jobs. This is not likely until at least next year, and withdrawing monetary support too soon would damage the institution’s credibility.
But investors sharply raised yields on 10-year bonds on Wednesday, and rising long-term rates will raise the cost of borrowing on mortgages and other loans, which could hurt the housing market and the economy in general. .
At the same time, while higher prices will usually be felt particularly by low-income households, moderately higher inflation may not be such a bad thing for many people and businesses.
For homeowners and others with fixed loans, higher inflation reduces the actual cost of paying interest charges on their debt.
More inflation could also help employees as it gives companies more pricing power, presumably allowing them to raise wages more easily; wage growth tends to follow inflation. Today there are signs that employers are raising wages to meet growing demand and what many are saying is a lack of available workers.
For Biden, it could help spur growth if more people, seeing prices rise, free up spending to avoid having to pay later. Higher inflation will reduce the real cost of paying the national debt, although the downside is that the government will almost certainly have to offer higher interest rates on new Treasury issues.
Longer term, UCLA’s Feler said, there’s good reason to believe there won’t be an inflationary spiral like the one the nation experienced in the 1970s, as some have warned. because today’s consumers have more information and many more products to choose from and can easily make substitutions.
Additionally, Feler said the growth of so-called superstar companies such as giant online stores and discount warehouses – which have gained market share as many small businesses have closed – could help contain the inflation because they can pass on to consumers the savings of their greater efficiency and purchasing power compared to suppliers.
“The thing is, you have to have very strong competition between these big superstar companies,” he said.
Other economists say that large companies, in a climate of greater market concentration, will find it easier to raise prices. In addition, China’s rise as a global factory over the past 30 years has helped keep prices low, but many companies are looking to remake supply chains for political and economic reasons, including including the risks of shock events such as the pandemic.
Michael Weber, an economist at the University of Chicago’s Booth School of Business, said inflation expectations might not be as “stuck” as the Fed and others think they are now.
In his research, Weber found that consumers’ inflation prospects are primarily influenced by the things they buy the most, like milk. (The price of fresh whole milk increased 4.4% last month compared to the previous year.)
“It could be really embarrassing for policymakers,” he said, “because their whole paradigm is implicitly based on entrenched inflation expectations.”