Inflation Has Arrived, but Washington Isn’t Racing to Limit Price Pops
Prices have risen more than Fed officials expected, based on both their public statements and their economic projections this year.
Why the big jump? Part of that is due to temporary data quirks, which were set to drive inflation up this year. Part of this is due to the rebound in prices for airline tickets, hotel rooms and other purchases affected by the pandemic from last year, also as expected. But the surprisingly large part of the increase is due to an increase in consumer demand which is straining delivery routes and exceeding the available supply for electronics, housing and washing machines.
This part of inflation is more tied to government policies, which put money in consumers’ pockets – and its future trajectory is much less predictable. Economists believe the bottlenecks will subside, but by how much and how long that will take is uncertain.
These price increases could have a downside.
Whether today’s inflation is significant and warrants an answer will depend on several factors.
If, as the White House predicts, the rapid price gains fade as the economy returns to normal, they shouldn’t be a big problem. Households are likely to have to spend a little more on certain goods and services, but may also find that they earn more. Workers are now seeing decent wage gains, but not quite enough to outpace price gains, and the labor market is expected to continue to strengthen as inflation subsides.
The largest price increases were also concentrated in only a few categories, such as used cars. Most families don’t buy cars as often, so the consequences of rising costs won’t be as big for consumers as a rapid and widespread increase in the prices of everything consumers buy, such as clothes and milk.
But if consumers and businesses come to expect higher prices and start accepting higher prices and demanding higher wages, it could widen inflation and keep it high. It would be a problem. Rapid inflation makes life difficult for people who live on savings, such as retirees. If it exceeds wage gains, it can erode a consumer’s ability to purchase goods and services. And while inflation is becoming difficult to predict, as it was in the 1970s and 1980s, it makes planning for the future difficult for businesses and households.
There are risks that it will take time for inflation to return to normal.
There are real reasons to fear that inflation may persist. Supply chain grunts are expected to subside over time, but new variants of Covid-19 and renewed lockdowns in some countries could prevent global trade chains from returning to normal. This could keep commodity prices high. (On the other hand, Jason Furman at Harvard points out that renewed lockdowns would also likely lead to lower consumer demand, which could lead to lower price pressures.)
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