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Inflation anticipation

Price increases overshot analysts’ expectations. Will they continue?

A customer loads lumber onto a cart at a Home Depot store in Pleasanton, Calif. David Paul Morris/Bloomberg via Getty Images

Inflation anticipation

In April, consumer prices on goods and services saw the sharpest monthly rise in more than 12 years: 0.8 percent from March. That’s an increase of 4.2 percent from a year earlier.

Americans are already feeling the effects at the gas pump, the used car lot, the home improvement store, and in the housing market. The news also stoked fears that inflation might set back an economy still recovering from the COVID-19 pandemic.

Analysts pointed to a number of triggers driving inflation, all related to the pandemic in some way: exorbitant government relief spending that began in the last months of the Trump presidency and that carried over into the Biden administration, economic shutdowns, supply chain disruptions, and government stay-at-home orders.

“We have too much money because we’ve printed it like mad to finance the government’s extravagance—and also we have too few goods because the economy hasn’t completely recovered,” Jerry Bowyer, chief economist at Vidant Financial, said.

Other events also exacerbated shortages: the Suez Canal blockage, the failure of Texas’ power grid, and the cyberattack on Colonial Pipeline.

Last March as shutdowns ensued, sawmills cut staff and in some cases halted production. Meanwhile, home renovation and construction surged. Now understaffed lumber companies are struggling to catch up to the backlog: Lumber prices rose 124 percent in 2021, evidenced in hardware stores and in rising prices for new home construction.

Rental car companies sold off parts of their fleets early in the pandemic. Now that Americans are traveling again, they’re struggling to rebuild their inventory and are thus selling off less. That’s only one factor contributing to the prices of used vehicles jumping 21 percent in a year. Shutdowns of microchip factories across the globe also stymied automobile manufacturing.

We have too much money because we’ve printed it like mad.

The price of food has already risen 3.8 percent over last year and seems poised to go up. Driving up costs is that businesses have posted “Help Wanted” signs to little avail (see “Help wanted but hard to find,” in this issue). Some companies raised wages to attract more employees, and they usually pass along those extra costs to customers.

Congress is largely to blame, according to Ryan Burge, an associate professor of politics at Eastern Illinois University. Under the Trump administration’s CARES Act, the federal government added $600 a week to state unemployment benefit checks, later cutting that amount down to $300 per week. In some cases, individuals can make more through unemployment than accepting a minimum wage job. Those benefits won’t expire until September.

“They overshot and gave people too much money. They assumed the economy was going to take longer to reopen,” Burge said. Congress could consider a proposal like the one Sen. Ben Sasse, R-Neb., suggested: give people a chunk of money now if they go back to work.

The Labor Department’s report on inflation took economists by surprise: They had predicted an increase in inflation of around 3.6 percent.

“This is one data point,” Richard Clarida, vice chair of the Federal Reserve, said. The central bank wants to see inflation at around the 2 percent range and expects to hit that benchmark later this year.

Fed governor Lael Brainard acknowledged in a May 11 speech that “employment and inflation are far from our goals,” but added, “if past experience is any guide, production will rise to meet the level of goods demand before too long.”

Fed officials have no current plans to raise interest rates.

“I think the Fed has been engaging in a lot of rhetoric which lets themselves off the hook,” Bowyer said. He said the pandemic created “temporary distorting effects.” Worth watching is whether Congress and the Fed continue to pump money into circulation and exacerbate inflation even when supply issues abate.

“[President Donald] Trump spent and borrowed a lot. The sense is [President Joe] Biden is going to do that even worse,” Bowyer said.

As inflation rises, Burge predicted Biden’s chances to make headway on other pricey legislation will decrease.

“The hope is that this will start resolving itself in the next three to five months,” Burge said. “If the next report is worse than this, then we’ve got a problem.”


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