Consumer prices surge as economy reopens
Several factors bring about inflation spike
Deborah Widger, of Queens, New York, normally rents a car to drive to the Philadelphia area to visit her parents several times over the summer.
But she said rental car prices are up 20% to 30% since her last visit and a three-day weekend rental would cost $500.
“I’ll take Amtrak,” said Widger, a retail consultant who lost her clients because of the pandemic and is living on enhanced unemployment benefits.
Consumer prices jumped 4.2% annually in April, the most in 13 years, sparking this question: Is it a blip or a harrowing return to the 1970s?
It isn’t just the usual culprit: gasoline. Pump prices have soared 50% from a year ago, but a core inflation reading that strips out volatile energy and food items increased 3% annually, the largest advance in 25 years.
Some of the price increases were eyepopping, particularly in an economy that for years has struggled to approach the Federal Reserve’s 2% annual inflation target. Just from March to April, used car prices climbed 10%; airline fares, 10.2%; hotel rates, 7.6%; car rental prices, 16.2%; admission to sporting events, 10.1%; household furnishings, nearly a percentage point; and car insurance, 2.5%.
Again, these are increases. “This is remarkable,” said Ian Shepherdson, chief economist of Pantheon Macroeconomics.
The surge is raising questions about Fed Chair Jerome Powell’s belief that the COVID-19-induced price spike is temporary. That outcome would likely keep the central bank’s key interest near zero until 2024, at the earliest.
A more enduring bout of inflation, however, could spook consumers and force the Fed to hike rates sooner, pushing up mortgage rates, among other borrowing costs, and crimping the recovery from the coronavirus recession.
Many economists continue to side with Powell, arguing the leap in prices is a byproduct of a reopening economy and should abate by next year. That contingent notes that consumer and business inflation expectations – a critical factor that determines how rapidly prices actually rise – remain stable.
“The economy should go back to a footing that’s more normal” by later this year or 2022, said Bill Adams, senior economist at PNC Financial Services Group.
Eighty-three percent of Americans are somewhat or very concerned about the recent acceleration in prices, according to a Harris Poll survey for USA TODAY conducted April 30-May 2. Sixty-four percent of respondents said they’re finding higher prices for food and groceries; 61%, for gasoline; 46%, for restaurant meals; 43% for personal care items; and 38% for household appliances.
Here’s why prices have risen so sharply and why many economists believe the episode will soon fade.
The big plunge: Prices tumbled last spring as the pandemic led states to shut down their economies. That’s boosting yearly inflation because today’s prices appear lofty compared to a much lower base. But that effect won’t be as pronounced by fall since energy and other commodity prices began rising by the second half of last year, Adams said.
Reopening economy: As more Americans are vaccinated, states are lifting restrictions. The U.S. economy is expected to be fully open by summer. And people are eager to travel as they “finally get to use their saved vacation days and try to make up for lost time,” Ashworth said, pushing up airline fares, hotel rates and car rental prices.
Stimulus money: Americans’ pentup demand for fun things to do has been juiced by lots of savings. Most people have received three rounds of government stimulus checks totaling $3,200. They’ve also socked away cash by limiting their traveling, dining out and other activities over the past year. Households have amassed a total $2.4 trillion in excess savings during the pandemic, according to Regions Financial.
Supply-chain disruptions: The global economy, including the U.S., is beset by snarls in the production and delivery of goods ranging from car and appliances to coffee and smart phones. Customer demand has bounced back even while factories, ports and warehouses remain understaffed because of COVID-related illness, childcare duties or social distancing mandates. Shipping containers are stacked high at ports. A computer chip shortage has especially hampered auto production.
Worker shortages: Restaurants, hotels and myriad other businesses are struggling to find workers just as customer demand is surging. Companies say many unemployed people prefer to receive enhanced jobless benefits that, in some cases, top their previous wages. Other Americans are still hesitant to look for a job during the health crisis or are caring for sick relatives or children who are distance learning at home. About 4 million people have dropped out of the labor force.
Inflation expectations: The biggest reason strong inflation is unlikely to persist is that the public expects price increases to remain modest over the long term, said Joseph LaVorgna, chief economist of the Americas for research firm Natixis. That’s largely because of forces such as discounted online shopping and the more globally-connected economy, which have held down inflation for many years.