Housing prices, gasoline prices, lumber prices, used-car prices, and grocery prices are all up. Is the United States on the verge of an inflation crisis?
Many people are not old enough to have lived through inflation of the late 1970s and early 1980s when homebuyers paid anywhere from 16% to 18% interest for a 30-year fixed-rate mortgage. More recently, the people experiencing supposed sticker shock when filling up their cars with gasoline as average prices creep over $3 per gallon for regular, forget that gas prices were over $3 per gallon between January 2011 and December 2014. Average prices at times reached nearly $4 per gallon in that period.
The consumer price index did rise 4.2% in April, the highest jump since 2008, rising higher than most experts predicted.
Still, whether or not we’re on the verge of a new inflationary period remains to be seen. It is not the first time, nor will it be the last, that politicians, economic experts, talking heads, and others had brought up the possible fear of inflation going back to when the U.S. was still in the throes of the Great Recession and up until several years ago. Some headlines:
2009: “Get ready for inflation and higher interest rates” — Wall Street Journal
2011: “Rising gas and food prices push U.S. inflation higher” — New York Times
2016: “Inflation will be the biggest economic story in 2016” — Business Insider
Following the 2009 financial crisis, the Federal Reserve raised interest rates to defend against deflationary pressures that never materialized. As such, Federal Reserve Chairman Jerome Powell, in a letter to Florida Sen. Rick Scott, who called inflation a “growing problem,” said he is taking a more cautious approach. He wrote, “We understand well the lessons of the high inflation experienced in the 1960s and 1970s and the burdens that experience created for all Americans. We do not anticipate inflation pressures of that type, but we have the tools to address such pressures if they do arise.”
Powell added that he also expects inflation to have a moderate rise above 2% after a decade in which it was too low.
The current rise in prices can primarily be attributed to what many call the end of the pandemic. Most states have begun lifting indoor mask mandates for fully vaccinated people as well as indoor capacity restrictions. When the Centers for Disease Control and Prevention announced new indoor mask guidance on May 13, the seven-day average of COVID-19 cases was just above 35,000 per day. That figure is now just over 16,000. Hospitalizations and deaths are continuing to fall as well, particularly as more people get the COVID-19 vaccine.
The pandemic created an economic crisis unlike anything in U.S. history. Economic downturns typically play out over months before the peak. In 2020, the unemployment rate went from 4.5% in March to nearly 15% in April. However, the recovery is going just as well.
Unlike financial disasters such as the 2007 housing crash that can weigh on an economy for years, the coronavirus pandemic was temporary, with most supply and demand for goods and services remaining intact where it was available. People also saved money. While many public-facing jobs were lost, other businesses remained and adapted to a remote working environment, and they continued to thrive. It allowed people to spend less, save more, and pay down debt.
Now that summer is here, and the country is primarily open to pre-pandemic levels, people want to spend money. Whether it’s vacations or more minor pleasures such as going to the movies, consumers are ready to open their wallets and pocketbooks.
That said, a fast recovery is also fueling demand that supply cannot match. Allen Sinai, chief global economist and strategist at Decision Economics, told the Wall Street Journal, “We’ve never had anything like it — a collapse and then a boomlike pickup.”
The shortage of labor, goods, and raw materials combined with higher demand fuels the short-term spike in consumer prices. Many businesses were surprised by the CDC’s May 13 announcement, particularly the restaurant and hospitality industries. When states announced they were flinging the doors open, restaurant owners had to scramble to meet the immediate demand. The tight labor market and wage competition are also factors in rising consumer prices.
The consensus from most analysts and experts is that the blip in prices is temporary. Many people may have to hold off a little longer and wait for things to balance out. Russell Price, chief economist for Ameriprise Financial, told the Washington Post, “Higher prices for things such as air travel, furniture, appliances, lumber, hotel stays, and automobiles should start to ease as supply and demand rebalance in these industries over time.”
“For these items, the best strategy may be to wait it out. It will be tough, given what we’ve been through, but you’re simply going to pay more if you want to be first in line,” he said.
Time will tell. Early on, however, it appears the price spikes are due more to consumer demand and the rebuilding of global supply chains that were interrupted by the pandemic most of last year and early into this year rather than an inflation crisis waiting in the wings.
