Most economists expect prices for many goods and services to show continued gains on Wednesday when the Labor Department releases its next monthly inflation report.
The Federal Reserve insists that today’s rising prices — up 2.6 percent over the past 12 months — will not blossom into anything like the economy-wide, double-digit inflationary spiral of the 1970s. Some economists, including Lawrence Summers, a former treasury secretary, however, warn that President Biden’s free spending could ignite inflation that would outstrip wage gains and leave consumers struggling to make ends meet.
The Fed, backed by most private-sector economists, says a temporary period of higher prices represents just the latest twist in the coronavirus pandemic’s unprecedented bust and boom. Fueled by government stimulus checks and pent-up consumer demand, the U.S. economy is galloping ahead. Yet many industries have not adjusted to the pandemic’s reshaping of demand, meaning that some factories cannot satisfy all potential customers.
“What we’re seeing right now is an economy struggling to recalibrate,” said Lindsey Piegza, chief economist for Stifel Financial in Chicago. “This is not a seamless process and it’s certainly not something that happens overnight.”
Even as the Fed reassures investors, expectations of future inflation, which over time can contribute to sustained price increases, reached their highest mark since 2013. A market gauge called the U.S. Treasury 10-year break-even rate reached 2.5 percent on Friday, up sharply from 1.99 percent at the beginning of the year.
The fast-growing economy is battling shortages of labor and raw materials. Freight costs are soaring. And executives are scrambling to maintain profit margins by passing on the higher costs to customers or by developing less expensive production methods.
Price gains are expected to peak in the second quarter, before easing later this year as production bottlenecks are cleared, according to economists surveyed by Bloomberg News.
But Friday’s disappointing jobs report — and the computer attack this weekend that idled Colonial Pipeline’s main East Coast fuel artery — underscored the daunting uncertainty surrounding the economy’s revival.
“What worries me the most is we don’t have any historical examples of how long bottlenecks persist or the damage they can do,” said Frances Donald, global chief economist for Manulife Investment Management. “This is one of the most complicated periods in modern economics.”
To date, the increase in inflation remains modest. Comparing current prices to those one year ago also overstates what’s actually in the economy. During the pandemic’s first months, many prices — including for hotel rooms, airplane tickets and men’s suits — collapsed. So year-over-year comparisons exaggerate the degree of change. Such distortions will become less significant over the remainder of this year.
The recent uptick in prices comes after decades of generally quiescent inflation. On an annual basis, the consumer price index has not been above 6 percent since the early 1990s.
Since the end of the financial crisis, in fact, the Federal Reserve often has worried about deflation — a self-perpetuating cycle of decreasing prices that erodes demand and employment. Over that 12-year period, the consumer price index rose by an annual 1.6 percent, below the Fed’s 2 percent price stability target.
Even now, prices are not rising in a uniform way.
In a $21 trillion economy, the prices of some goods are always rising while others are decreasing. But the past year’s price mosaic is unusual.
In some sectors, such as semiconductors, the problem is too much demand, outpacing available supplies. In others, such as restaurants and airlines, there is plenty of supply, but not enough demand.
Energy prices are up more than 13 percent in the past 12 months, as resurgent demand from the economic recovery collided with weather-related disruptions to the petrochemical industry in Texas. Meanwhile, the cost of women’s dresses decreased by more than 11 percent, as people opted for casual attire while working from home.
Apples and oranges are up more than 7 percent over the past year. Canned fruit and vegetables also have risen by more than the overall average.
“The structure of the economy has changed. We recognize the new economic reality and market challenges we face, specifically the inflationary pressure we are facing on all fronts which is forcing us to increase our prices,” Mohammad Abu-Ghazaleh, chief executive of Fresh Del Monte Produce, told investors Wednesday.
The pandemic has rearranged the market for new and used cars from the factory gate to the showroom floor. A semiconductor shortage is hobbling auto plants even as consumers spooked by public transit risks rush to buy personal vehicles. With new cars in short supply, more consumers are turning instead to used models.
That has driven used car prices up 37 percent over the past year, according to Manheim Auctions, the world’s largest automobile auction company.
“I never thought we’d see a market like this in a million years,” said Warfa Isse, general sales manager for Koons Tysons Toyota. “Some common used cars are selling at more than their original sticker price when they were new.”
During the first quarter, General Motors’ average transaction price in North America was up 9 percent year over year, including a 10 percent gain for full-size pickup trucks and 20 percent for sport utility vehicles, Paul Jacobson, the automaker’s chief financial officer, told investors on a recent call.
Other price increases can be traced to industry miscalculations. When the pandemic began, many sawmills shut down, anticipating a housing slump that never materialized.
Instead, the work-from-home era is pushing people to buy new homes. As a result, lumber futures on Friday hit $1,686 — more than six times the early April 2020 low of $259.80.
“There’s plenty of raw material. The constraint really seems to be on the sawmills,” Ryan Marshall, chief executive of Pulte Group, told investors in late April.
The home builder said it expects its costs to rise by 6 percent to 8 percent this year, which it intends to pass on to consumers in the form of higher home prices.
Production of hardwoods used in cabinets, furniture and flooring remains almost 15 percent below pre-pandemic levels, according to Mark Schweizer, vice president for marketing and strategy with Northwest Hardwoods in Tacoma, Wash.
The industry is struggling to hire enough workers to fill its logging crew and sawmill needs, while facing soaring transportation costs, he said.
“Demand is screaming hot and everybody is trying to get more wood through,” he said.
Lumber is a good example of why Federal Reserve Chair Jerome H. Powell is so confident that any inflation will be temporary. Once more sawmills return to their normal level of activity, lumber prices should drop.
Northwest expects prices to keep increasing through the end of June, before plateauing in the third quarter and softening toward the end of the year.
The idiosyncratic nature of the economy’s price outlook complicates the Fed’s job and explains why Powell is waiting to act. Raising interest rates — the Fed’s traditional anti-inflation tool — would chill all sectors, not just those afflicted with rising prices. In the Fed’s view, enduring a temporary bout of higher prices in some industries is the price of a full economic recovery.
Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said last week that newly vaccinated Americans were ramping up their spending in a “freedom-induced demand spurt” that producers will eventually accommodate.
The Fed’s confidence that supply-chain bottlenecks and labor shortages will pass is endorsed by most economists. But the pandemic’s aftermath is unlike any previous period, meaning that all forecasts are clouded by uncertainty.
The price picture also is expected to change this summer as consumers redirect money they are now spending on goods into services such as restaurant meals and movie tickets. How quickly that change will occur — and how it will affect various prices — is a matter of debate.
Still, most economists anticipate that current production and labor bottlenecks will sort themselves out by the end of the year. Even those who anticipate higher-than-consensus inflation do not expect a full-scale inflationary breakout.
Paul Ashworth of Capital Economics wrote a client note last week headlined, “Coming surge in core inflation to be sustained.” He expects inflation to peak near 4 percent this year before falling back.
As the economy rebalances heading into 2022, government stimulus efforts will fade and long-term forces that have held prices in check will reassert themselves, said Nathan Sheets, chief economist for PGIM Fixed Income. An aging population, automation and global competition will combine to soften demand and weaken companies’ pricing power.