Rising prices bring spike in inflation not seen in years
Used car and truck prices jumped 10% between March and April, the largest increase in nearly 70 years. Airfares and hotel rates rose about as much. And consumers paid significantly more for computers, shoes, furniture, sporting equipment and a host of other goods and services.
Inflation is back, after decades in which consumer prices rose hardly at all and economists worried about the dangers of deflation and the economic stagnation it can bring.
The big question now is whether the current price surges are temporary or warning signs of serious problems ahead.
One possibility is that the economy and the U.S. workforce, after being deeply shaken up by the COVID-19 pandemic, are experiencing the ups and downs of getting back to normal.
The other possibility, that the economic shocks of the pandemic have set off deepseated inflationary forces, is far more serious. That would put pressure on the Federal Reserve to step on the economic brakes and President Biden to curb his spending plans even though unemployment remains high and thousands of businesses are still struggling to survive.
Most economists agree that inflation worries, at least for now, are overdone. That's in part because the monthly reading of consumer prices is compared against last year's level, when prices were unusually depressed due to the collapse in demand resulting from lockdowns and stay-at
home orders. Later months of year-over-year comparisons won't have such big distorting effects.
Leo Feler, a UCLA economist who is preparing the inflation section of the Anderson Forecast, said prices for food consumed at home, which rose in April, should start to revert as people go out more. And as supply constraints and bottlenecks clear up, other inflationary pressures also will fade. Still, some economists have been warning for some time about the risks of spiraling inflation, and those fears were heightened and sparked a second day of sell-off on Wall Street after the government's report Wednesday that consumer prices rose 4.2% in April from a year earlier.
That was the highest jump since September 2008 and well above what analysts were forecasting.
Economists say what happens with prices down the road will be determined by inflation expectations and the slack in the economy, particular labor.
The upturn in prices may be a shock for a current generation that has known almost nothing in terms of meaningful inflation, with few exceptions like occasional surges in gas and food prices.
"Not too many consumers think the latest bout of inflation is temporary. They see prices of everything from computer chips to chicken wings jumping," said Sung Won Sohn, professor of finance and economics at Loyola Marymount University.
"Given the tightening labor market, labor costs, which account for at least two-thirds of the [consumer price index], will lift off leading to higher wages and inflation expectations," Sohn said.
What's more, price increases are not easily lowered; they tend to stick. And last month, about 36% of small businesses surveyed by the National Federation of Independent Business indicated that they had raised selling prices, the highest share in 40 years.
Natasha Amott, who operates a kitchenware retail store in downtown Brooklyn called Whisk, said she had little choice but to raise prices, especially on steel products such as baking pans, cookie sheets and skewers. She said half of her 200 suppliers have announced price increases already or by summer, many of them 5% or more.
"Absolutely no way we can eat it all," Amott said of the price increases, adding that she's also paying more in freight costs. "For the vast majority of products, consumers will see a nickel here, a quarter there, sometimes it's whole dollar increases."