When it comes to the recent bout of surprisingly high inflation in the United States, Joe Biden and Jerome Powell are both making the same bet: it’s only temporary.
Over the past few months, consumer prices have soared in a way not seen in decades, a fact that has clearly frightened one. good number Americans. But as the President and Chairman of the Federal Reserve both pointed out, the increases were largely due to passenger issues such as supply chain issues in a handful of industries, leading to things like an unprecedented rise in the cost of used cars. .
“These are factors that will subside over time and then inflation will get closer to our targets,†Powell said. noted in June. In a recent speech meant to calm voters’ nerves, Biden also said the growls should “be temporary.”
Like many opinion journalists (not to mention real economists), I share this diagnosis. The tricky thing, both politically and economically, is that “temporary†does not necessarily mean “short†in this case. The inflation we are experiencing may just be a ‘transitory’ phenomenon – as Powell likes to say – that we have to contend with as the economy returns to normal, and the worst may even be behind us. . But even so, there is good reason to believe that we could have many more months of faster price hikes than Americans would like. Elected officials and voters must be mentally prepared for this.
Before we talk about where prices are heading, we need to explain why they have gone up in the first place.
Some of the story is probably familiar by now. For example, you’ve almost certainly read or heard how inflation has been disproportionately fueled by the car and truck market. The global semiconductor shortage has crippled the production of new automobiles because today’s vehicles require loads of computer chips. This led to a mind-boggling race in used cars, which alone accounted for about a third of June’s increase. consumer price index.
But the inflation story isn’t just about the cost of a certified pre-owned pickup at CarMax right now. Many big ticket items – home appliances, furniture, sports equipment like bicycles – have become more expensive thanks to a combination of supply chain backlogs and consumer demand looking to cut their stimulus checks. Generally speaking, we have seen the cost of these types of “durable goods†skyrocket. The cost of so-called non-durable goods – think of what you consume or wear, such as food, clothing, makeup, or pharmaceuticals – has also increased, but not so dramatically. Inflation in services, on the other hand, basically follows its long-term trend.
This is Exhibit A for anyone calling for calm on inflation right now. At some point, the supply chain problems will ease and prices will likely please or start to come down. These are also not the kind of problems you usually try to solve by raising interest rates, unless your goal is to cause the economy to crater so deep that people stop buying money altogether. new washers and dryers.
There are also signs that inflation is already heading in the right direction, although you kind of have to scour the Bureau of Labor Statistics monthly charts to find them. Each month the government releases a version of the Consumer Price Index that subtracts the volatile effects of food and energy (which tend to rebound a lot) as well as housing (including the cost of renting a hotel room) and used cars. . It’s a decent barometer for what inflation looks like when you pull out a handful of key categories that have been distorted by the pandemic and the economy. reopening. In June, the index rose 0.5 percent, corresponding to an annual rate of 6 percent. It’s fast, but it was slower than the 0.6% increase in May, or the 0.7% increase in April. We are seeing progress.
So why worry about the persistence of inflation? First, we don’t really know when all of these supply chain issues will sort themselves out. The world still does not have enough semiconductors, and although there are signs of a slowdown in the used car market, analysts don’t expect the car market to return to normal before 2022. global shipping crisis this increased the cost of imports, which experts believe could increase the cost of holiday shopping. (The situation in the world’s ports is so bad that Home Depot has literally contracted his own boat to start transporting goods to the United States)
Second, while some inflationary forces may subside a bit, others may soon heat up. Rents, for example, have been increasing much more slowly than normal since the start of the pandemic. But, like the New York Times explained this week, they may soon start to intensify again. Since housing makes up a large part of the consumer price index, this could have a major impact on inflation. Wages are another potential problem. Despite complaints from business owners who have struggled to recruit, the cost of hiring does not appear to have been a major factor in inflation so far. But if companies keep raising wages, you might see them passing more of the expense on to customers (that would, of course, be a good job for workers in many low-wage service industries).
Even if inflation starts to slow significantly, the final figure for 2021 could be quite high by recent standards. Here are some sample calculations: Let’s say inflation fell back to an annual rate of 3% for the second half of the year, which is about a third of the pace we’ve seen in the past three months. In this case, the CPI would end the year up more than 5% (the Federal Reserve’s official target, which it has generally stayed below, is 2%).
Could it be a disaster? No, I do not think so. It also wouldn’t mean that, say, the persistent high inflation of the 1970s is making a comeback. For this to happen, most economists believe that business leaders should believe that the Federal Reserve would allow persistently higher inflation in the future and start raising their prices accordingly. This is the long-term danger that people like former Treasury Secretary Larry Summers have warned against, but as of yet, there is no real sign that such a shift in perspective is happening among investors or businesses. Market measures of inflation expectations, such as yields on inflation-protected treasury bills, have actually fallen recently, suggesting that Wall Street’s money men are less concerned about the possibility.
Still, a 5% price hike is the sort of thing that could irritate many voters, especially if their paychecks don’t follow, and that would likely remain a political issue at least until early next year. , which would potentially complicate the negotiations. on Biden’s spending plans in Congress. (Not for nothing, Senator Joe Manchin was laugh at inflation latelyEconomically, this wave of inflation can be the equivalent of a long COVID – a strange period of turmoil and fog where the best cure is probably time, although we don’t know exactly how long it will last. . Politically, this will take a little patience.