Business

Inflation is pretty high right now, but it probably won’t be a huge problem in the long term

used car lot
Used cars were responsible for a third of the inflation spike between May and June.

  • Consumer prices rose 0.9% between May and June, a 13-year high.
  • But a large part of the increase came from items affected by the pandemic and reopening.
  • As the economy returns to normal, these prices should stabilize, keeping inflation in check.
  • See more stories on Insider’s business page.

The much-expected wave of inflation amid an unprecedented post-pandemic economic reopening is here, but how long it will stay with us is an open question.

The Bureau of Labor Statistics reported Tuesday that the Consumer Price Index, which measures changes in the prices of a basket of common goods and services, rose 0.9% between May and June. That was far higher than Bloomberg’s consensus economic forecasts of 0.5%, and according to BLS, was the largest one-month jump in prices since June 2008.

The price index was 5.4% higher than it was in June 2020, marking another record high for recent years:

Too much inflation for too long can cause a lot of trouble for an economy: Consumers are able to buy less stuff if goods and services are too expensive, and savers and investors can see their real returns plummet if the interest rates they receive can’t keep up with rising prices.

But the current round of price increases may be more benign, and could very well abate within the next several months.

A lot of recent inflation is from the weirdness of a post-pandemic economic reopening

Much of the inflation seen in recent months comes from the collision between supply chains still recovering from the disruption of the pandemic and a surge of pent-up demand as vaccination rates increase and lockdowns and health restrictions lift.

As Federal Reserve Chair Jerome Powell pointed out in testimony to Congress on Wednesday afternoon, goods and services that have been especially affected by the pandemic and reopening have seen the biggest price increases.

Powell said, “the incoming inflation data have been higher than expected. But they’re actually still consistent with what we’ve been talking about, that the very high inflation readings are coming from a small group of goods and services that are directly tied to the reopening of the economy. It’s new cars, used cars, rental cars, hotel rooms, airplane tickets – things we understand.”

Auto manufacturers have been facing a shortage of computer chips, slowing production of new cars. Meanwhile, demand for used cars has skyrocketed, leading to used cars and trucks seeing a historical record-high 10.5% price increase between May and June alone. BLS noted that about a third of the total CPI increase between May and June came from used cars and trucks.

Pent-up demand for travel after a year of pandemic lockdowns has led to big price increases in travel-related services like airline tickets, rental cars, and hotels, as noted by Powell.

The good news is that as the economy returns to normal, these markets should settle down somewhat. According to Cox Automotive, wholesale car prices declined from May to June, which should lead to retail prices tapering off sooner rather than later. And as in-demand businesses like airlines and hotels continue to hire or rehire workers and rebuild capacity to meet heightened demand, prices should stabilize there as well.

Of course, there are still risks that inflation could go longer and higher than expected. Housing prices have surged this year, and if that continues it could lead to more permanent cost increases. Supply chains and labor markets still need to stabilize, and if they don’t, prices could keep increasing.

Still, policymakers and markets seem to be not overly worried about longer-term inflation. Powell wrote in prepared remarks before Wednesday’s testimony that the Fed expects that inflation “will likely remain elevated in coming months before moderating.” A bond-market measure that roughly shows what investors expect inflation to look like in five years is a bit higher than before the pandemic, but far from levels that would suggest sustained high inflation.

While the future course of inflation is still an open question, there’s a good chance that the pressure on Americans’ wallets should subside in the next few months.

Read the original article on Business Insider

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