U.S. confronts unfamiliar inflation risk
Most economists expect production and labor bottlenecks to ease — and prices to recede — by the end of the year
Widespread shortages and production snags are driving prices higher for many everyday items, as an uneven economic reopening leaves Americans facing the unfamiliar risk of inflation.
Significant price increases have affected used cars, medical care, appliances, energy, food and cigarettes in recent months, according to government data. Gas prices headed higher Monday — before ending the day almost unchanged — after a cyberattack forced the closure of the nation’s largest fuel pipeline.
Most economists expect prices for many goods and services to show continued gains Wednesday when the Labor Department releases its next monthly inflation report.
The Federal Reserve insists that today’s rising prices — up 2.6 percent over the past 12 months — will not blossom into anything like the economywide, double-digit inflationary spiral of the 1970s. Some economists, including Lawrence Summers, a former treasury secretary, however, warn President Joe Biden’s free spending could ignite inflation that would outstrip wage gains and leave consumers struggling to make ends meet.
The Fed, backed by most private-sector economists, says a temporary period of higher prices represents just the latest twist in the coronavirus pandemic’s unprecedented bust and boom. Fueled by government stimulus checks and pent-up consumer demand, the U.S. economy is galloping ahead. Yet many industries have not adjusted to the pandemic’s reshaping of demand, meaning some factories cannot satisfy all potential customers.
“What we’re seeing right now is an economy struggling to recalibrate,” said Lindsey Piegza, chief economist for Stifel Financial in Chicago. “This is not a seamless process, and it’s certainly not something that happens overnight.”
Even as the Fed reassures investors, expectations of future inflation, which over time can contribute to sustained price increases, reached their highest mark since 2013. A market gauge called the U.S. Treasury 10-year break-even rate reached 2.5 percent Friday, up sharply from 1.99 percent at the beginning of the year.
The fast-growing economy is battling shortages of labor and raw materials. Freight costs are soaring. And executives are scrambling to maintain profit margins by passing on the higher costs to customers or by developing less expensive production methods.
Price gains are expected to peak in the second quarter, before easing later this year as production bottlenecks are cleared, according to economists surveyed by Bloomberg News.
But Friday’s disappointing jobs report — and the computer attack this weekend that idled Colonial Pipeline’s main East Coast fuel artery — underscored the daunting uncertainty surrounding the economy’s revival.
“What worries me the most is we don’t have any historical examples of how long bottlenecks persist or the damage they can do,” said Frances Donald, global chief economist for Manulife Investment Management. “This is one of the most complicated periods in modern economics.”
To date, the increase in inflation remains modest. Comparing current prices to those one year ago also overstates what’s actually in the economy. During the pandemic’s first months, many prices — including for hotel rooms, airplane tickets and men’s suits — collapsed. So year-over-year comparisons exaggerate the degree of change. Such distortions will become less significant over the remainder of this year.
The recent uptick in prices comes after decades of generally quiescent inflation. On an annual basis, the consumer price index has not been above 6 percent since the early 1990s.
Since the end of the financial crisis, in fact, the Federal Reserve often has worried about deflation — a self-perpetuating cycle of decreasing prices that erodes demand and employment. Over that 12-year period, the consumer price index rose by an annual 1.6 percent, below the Fed’s 2 percent price-stability target.
Even now, prices are not rising in a uniform way.
In a $21 trillion economy, the prices of some goods are always rising while others are decreasing. But the past year’s price mosaic is unusual.
In some sectors, such as semiconductors, the problem is too much demand, outpacing available supplies. In others, such as restaurants and airlines, there is plenty of supply, but not enough demand.