When it comes to America’s recent bout of unexpectedly high inflation, Joe Biden and Jerome Powell are both making the same bet: It’s just temporary.
Over the past few months, consumer prices have spiked in a way not seen for decades, a fact that has clearly spooked a good number of Americans. But as the president and Federal Reserve chair have both pointed out, the increases have been driven in large part by passing problems like supply chain snafus in a handful of industries, leading to things like an unprecedented jump in the cost of used cars.
“These are factors that will wane over time and then inflation will then move down toward our goals,” Powell said in June. In a recent speech meant to calm voters’ nerves, Biden similarly said the snarls were “expected to be temporary.”
Like a lot of opinion journalists (not to mention actual economists), I agree with this diagnosis. The tricky thing, both politically and economically, is that “temporary” doesn’t necessarily mean “short” in this case. The inflation we’re experiencing may just be a “transitory” phenomenon—as Powell likes to put it—that we have to cope with as the economy gets back to normal, and the worst of it could even be behind us. But even so, there are good reasons to think we could have many more months of prices rising faster than Americans would like. Both elected officials and voters need to be mentally prepared for that.
Before we talk about where prices are headed, we should talk about why they’ve shot up in the first place.
Some of the story is probably familiar by now. For instance, you’ve almost certainly read or heard about how inflation has been disproportionately fueled by the car and truck market. The global semiconductor shortage has bogged down new auto production because today’s vehicles require loads of computer chips. That has led to a mind-boggling run on used cars, which on their own accounted for about one-third of June’s increase in the consumer price index.
But the inflation story isn’t just about the cost of a certified pre-owned pickup at CarMax right now. Many big-ticket items—appliances, furniture, sports equipment like bicycles—have gotten more expensive thanks to a combination of supply chain backlogs and demand from consumers looking to spend down their stimulus checks. Broadly speaking, we’ve seen the cost of these kinds of “durable goods” leap. The cost of so-called nondurable goods—think stuff you consume or wear out, like food, clothing, makeup, or pharmaceuticals—has risen too, but not as dramatically. Inflation in services, meanwhile, is basically plodding along its longer-term trend.
This is Exhibit A for anyone urging calm about inflation at the moment. At some point, supply chain problems will ease up and prices will presumably either plateau or start to drop back down. These also aren’t the sorts of issues that you’d ordinarily try to address by hiking interest rates, unless your goal was to crater the economy so thoroughly that people stop buying new washers and dryers altogether.
There are also signs that inflation is headed in the right direction already, though you sort of have to scour the Bureau of Labor Statistics’ monthly tables to find them. Each month, the government publishes a version of the consumer price index that subtracts the volatile effects of food and energy (which tend to bounce up and down a lot) as well as shelter (including the cost of renting a hotel room) and used cars. It’s a decent barometer for what inflation looks like when you take out a handful of key categories that have been warped by the pandemic and economic reopening. In June, the index rose by 0.5 percent, which works out to a 6 percent annual rate. That’s brisk, but it was slower than the 0.6 percent increase in May, or the 0.7 percent one in April. We’re seeing progress.
So why worry about inflation lingering? First, we don’t actually know when all of these supply chain problems are going to straighten themselves out. The world still doesn’t have enough semiconductors, and while there are some signs that the used car market is cooling off, analysts don’t expect the car market to get back to normal until some time in 2022. There is also a severe global shipping crunch that’s driven up the cost of imports, which experts are concerned could drive up the cost of holiday shopping. (The situation in the world’s ports is so bad that Home Depot literally contracted its own boat to start ferrying merchandise to the U.S.)
Second, while some inflationary forces might be cooling off a bit, others could soon heat up. Rents, for instance, have been rising much more slowly than normal since the pandemic began. But, as the New York Times explained this week, they could soon start escalating again. Since housing makes up a big chunk of the consumer price index, that could have a major impact on inflation. Wages are another potential issue. Despite the complaints of business owners who’ve had trouble staffing up, the cost of hiring doesn’t seem to have been a big factor in inflation so far. But if companies continue to raise wages, you might see them pass more of the expense onto customers (that would, of course, be a fine trade for workers in a lot of lower-wage service industries).
Even if inflation starts to slow down considerably, the final number for 2021 could end up fairly high by recent standards. Here’s some sample math: Let’s say inflation fell back down to a 3 percent annual rate for the back half of the year, about one-third the pace we’ve seen the last three months. In that case, the CPI would still end the year up more than 5 percent (the Federal Reserve’s official target, which it has usually stayed below, is 2 percent).
Would that be a catastrophe? No, I don’t think so. It also wouldn’t mean that, say, the high, persistent inflation of the 1970s has made a comeback. For that to happen, most economists believe that business managers would have to believe that the Federal Reserve would allow permanently higher inflation in the future and start raising their prices accordingly. That’s the long-term danger that people like former Treasury Secretary Larry Summers have been warning about, but as of now, there’s no real sign that such a shift in perspective is taking place among investors or corporations. Market measures of inflation expectations, such as the yields on inflation-protected Treasury bonds, have actually been dropping recently, suggesting Wall Street’s money men are getting less concerned about that possibility.
Still, a 5 percent jump in prices is the kind of thing that could irk a lot of voters, especially if their paychecks don’t keep up, and which would likely linger as a political issue at least into early next year, potentially complicating negotiations over Biden’s spending plans in Congress. (Not for nothing, Sen. Joe Manchin has been carping about inflation lately.) Economically, this wave of inflation may be the equivalent of long COVID—a strange period of discombobulation and fog where the best medicine is probably time, even if we don’t know exactly how long it will last. Politically, it’s going to require some patience.