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The biggest surge in U.S. inflation in more than a decade was supposed to start petering out this summer, but it looks like the bout of higher prices is going to last somewhat longer.
A trio of inflation barometers this coming week are expected to show another sizable jump in the cost of living in June, punctuated by a sharp 0.5% increase in the consumer price index for June on Tuesday.
If Wall Street’s forecast is spot on, that would keep the increase in the cost of living over the past year at or near a 13-year high of 5%.
Prices for a variety of goods and services — ranging from bacon and gasoline to used cars and vacation rentals — have risen rapidly as the pandemic wanes and the economic recovery speeds up.
Millions of Americans, flush with savings and feeling confident again, are spending more freely and rushing to do all the things that were off-limits during the pandemic. That’s part of the reason prices are rising.
Businesses, for their part, are struggling to keep up with demand because they can’t get enough supplies on time.
The pandemic created widespread shortages of key materials such as computer chips. What’s more, the ports are clogged, railroads are backed up and even truck drivers are hard to find. These are also source of price pressures.
Labor costs are on the rise as well as companies scramble to fill a record number of job openings. Many have had to raise wages or offer other incentives to lure people back into the workforce.
Read: Job openings hit record 9.2 million, but workers aren’t easy to find
Also: This is the No. 1 reason unemployed Americans aren’t looking for work
The Federal Reserve expected inflation to rise sharply this year — just not as much as it has.
“Participants remarked that the actual rise in inflation was larger than anticipated,” according to the Fed’s usual bone-dry language in the minutes of its last policy meeting in June.
The Fed even acknowledged that “supply disruptions and labor shortages might linger for longer and might have larger or more persistent effects on prices and wages than they currently assumed.”
Be that as it may, the Fed is sticking to its guns that inflation will eventually taper off toward its 2% goal. If not by next year then by 2023.
For one thing, the low inflation readings in the first three months of the pandemic last year are dropping out of the 12-month average.
These so-called base effects made inflation seem lower than it really was for most of the past year and now they are making it appear to be higher.
More important, the Fed predicts the supply disruptions will go way by next year as the U.S. and global economies return to normal.
Millions of people who lost their jobs or left the labor force during the pandemic, the thinking goes, will also go back to work and ease the upward pressure on wages.
So far investors have kept cool over the potential threat of inflation.
The stock market
DJIA,
SPX,
keeps going up and bond yields have fallen recently. Normally interest rates would rise and stocks would fall if inflation was viewed as a serious threat.
Read: Falling bond yields point to ‘growth scare’
The big worry among those who think the Fed is underestimating inflation is that the increase in prices will stay higher for longer than the central bank predicts.
“Inflation pressures are transitory to a substantial degree, but price hikes are showing more staying power than Fed officials would like to admit, and the sharp increases in wages in recent months is likely to continue to exert upward impetus on prices for a while,” contended chief economist Stephen Stanley of Amherst Pierpont Securities.
In a worst-case scenario, inflation would remain well above the Fed’s 2% target. Say 2.5% to 3%.
If that turned out to be the case, the central bank might have to raise interest rates more quickly and to a higher level than the Fed now thinks will be necessary. Such an outcome could short-circuit the economic recovery.
The moment of truth is still a long way off, though.
The Fed has made it quite clear it won’t let up on its easy-money strategy this year until it gleans more information on how inflation is behaving.
