Rising prices could be a sign of impending crisis — or just the birth pains of a post-COVID boom. EricLevitz writes
The price is not all right? Photo: Wu Xiaoling/Xinhua News Agency/Getty Images These days, Americans can’t escape rising prices. Go to the grocery store for some pork, and you’ll pay nearly 5 percent more than you did last spring. Go to the gas pump, and filling your tank will damn near empty your wallet. Check out that open house down the street, and you’re liable to see an asking price 15 percent higher than you thought it would be.
Why inflation is rising. In April, inflation in the U.S. rose at its fastest pace since 2009, with the consumer price index increasing at a 4.2 percent annual rate. That was significantly higher than economists had expected. Futures of global commodities integral to economic growth — including oil, gasoline, corn, and copper — now cost twice as much now as they did a year ago. And Americans weren’t alone in facing such sharp price hikes: Across the developed world, prices rose 3.
2) Going on vacation or out to eat is much more appealing now than it was at the onset of global plague. The airline, hotel, and restaurant industries were all hammered by the pandemic. As public-health-conscious Americans have become vaccinated en masse, these sectors have gotten caught between surging demand and inadequate supply . This has yielded price hikes: The average price of an airline ticket was 10.
The global-shipping industry is also disoriented. The combination of pandemic-induced disruptions to supply chains and booming demand for consumer goods, as affluent households the world over cut back on services and ramped up online ordering, has yielded a shortage of shipping containers, which has pushed transport costs to their highest level since 2010. And that’s making just about every imported good a bit more expensive.
What happens if today’s inflation becomes a long-lasting trend? There’s no debate about whether America is experiencing significant inflation. But a short-term increase in prices would be no big deal; in fact, it might even be a good thing, since inflation has been excessively low over the past decade.
All this said, the costs and benefits of a high-inflation environment may be beside the point. The Federal Reserve has an inflation target of 2 percent: If inflation averages far above that number for months on end, the central bank will raise interest rates to choke off the flow of credit and slow spending in the economy. In other words, policy-makers will not tolerate a sustained period of ultrahigh inflation. But interest-rate hikes are a very blunt instrument for lowering the prices.
3) Long-term structural trends are less deflationary than many think. The Fed’s comfort with current inflation is premised, in part, on the fact that there’s been a long-term trend toward deflation in the global economy. After the 2008 crisis, central banks had so much trouble generating enough inflation, they had to hold interest rates near zero .
1) A supermajority of April’s inflation derived from spikes in industries hammered by the pandemic. Nearly 60 percent of April’s consumer price increase came from just five categories — used cars, rental cars, airfare, lodging, and food away from home. In normal times, these items comprise little more than 13 percent of the CPI. As we saw above, demand for these goods and services was decimated by the pandemic, and, thus, prices are rising from a ridiculously low baseline.
The July lumber futures contract has fallen by 25 percent from its May 7 peak, a sign that the market has found a level where buyers are balking rather than continuing to pay up. And for the first time since buying surged last spring, the inventory of homes for sale has increased for two consecutive weeks, a sign that normal seasonality might be returning.
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