Mon, January 17, 2022


Prices rise 5.4% in June over last year, largest spike since 2008, as economy continues to recover

WASHINGTON - Prices rose 5.4% in June compared to a year ago, marking the largest spike since 2008 as the pandemic-battered economy regains its footing and questions build over how long this steady climb in inflation will last.

Inflation has been on a steep rise for about four months as the recovery gains steam, President Joe Biden's $1.9 trillion stimulus package revs up the economy and consumer demand rebounds much faster than supply chains can catch up. Policymakers at the Federal Reserve and the White House have consistently said the price pops aren't here to stay, and that it will take patience for the economy to come back to full strength and for prices to simmer down.

"We expected a pop in inflation like this," San Francisco Fed President Mary Daly said of the inflation data on CNBC on Tuesday. "Right now it's really remain steady in the boat. Don't read too much signal out of any month of data. And let's get through this volatile period so we can really see where the economy is."

However, that message is being increasingly tested, especially as Americans feel the strain at the grocery store and the gas station and in the housing market. The pandemic exacted an unprecedented toll on the global economy, and no one knows for sure how long it will take for inflation to reverse its aggressive climb.

Meanwhile, Republicans and some prominent economists say the Fed is already behind the curve when it comes to tamping down inflation.

"We need to acknowledge that inflation is with us and it's more severe than expected," Sen. Patrick Toomey of Pennsylvania, the top Republican on the Senate Banking Committee, said during a Tuesday hearing. "The Fed has assured us that it's all transitory . . . I remain concerned that they put themselves in a position of being behind the curve if they're wrong."

One big challenge for the policymakers is Americans' perceptions of inflation, which can influence consumer spending choices. If Americans expect the cost of goods and services will keep rising, they may be more likely to buy more furniture or plane tickets now, before the price tag stings even worse. That cycle of behavior only pushes prices higher, making those very inflation expectations self-fulfilling.

If inflation continues to mount through the rest of 2021 and beyond, policymakers may find it harder to convince Americans that higher prices will be short-lived.

"What really matters for peoples' pocketbooks is what's happening with the prices that they face," said Michael Strain, director of economic policy studies at the right-leaning American Enterprise Institute. "If households keep getting hit with 4 or 5 percent inflation month after month, at what point does that change their expectations about future inflation? And do those expectations then become self-fulfilling?"

A look at prices for two major categories - used cars and trucks, along with shelter - demonstrates how murky it can be to parse out temporary inflation dynamics from more persistent ones.

Prices for used cars and trucks have risen 45.2% in the past year. They soared 10.5% in June alone, after adjusting for seasonality, and accounted for more than a third of that month's overall inflation.

A global microchip shortage has hamstrung supply chains for new cars. That trickles down to the used-car market, which relies heavily on trade-ins and auto parts. Adding to the strain is that many plants also tend to slow down production over the summer for maintenance, said Michelle Krebs, executive analyst at Cox Automotive.

For now, the expectation is that those backlogs will clear. Economists don't expect used-car prices to keep up their historic surge forever.

But at the same time, auto industry experts say the chip shortage doesn't have a quick fix. And for drivers who have been trying desperately to get an affordable car, the search has been difficult for months already.

"We have to brace ourselves for a tough summer," Krebs said.

For the category called "shelter," prices rose 2.6% compared with a year ago, and 0.5% from May to June. Drilling down deeper in that category, hotel prices have risen - up 7.9% compared to the previous month, adjusted for seasonality - plus the cost of rent was also up 0.2%. Despite a recent rapid recovery from their pandemic collapse, hotel prices have yet to fully return to pre-pandemic levels.

Yet hotels and rent could end up telling different stories about inflation. Many hotels sat vacant for much of 2020, if they stayed open at all. Now, as more Americans become vaccinated and excitedly book long-awaited vacations, demand is surging, pushing the price of hotel rooms back up. Economists and policymakers expect that as the tourism industry reemerges from the pandemic, prices for hotels, along with airline tickets and rental cars, will normalize, too.

At the same time, in pockets all over the country, rents are rising, with tenants facing steeper bills. Economists and housing advocates fear that if landlords can lock in more expensive leases, rent won't come back down.

Higher rents are adding pressure to an already-fraught housing market. Renters behind on bills have largely been able to stay in their homes because of a federal eviction moratorium. But when that protection lifts on July 31, it could be all the more expensive for people to keep roofs over their heads.

Soaring home prices also make it harder for first-time buyers to purchase homes. Low interest rates and a booming stock market have helped wealthier Americans scoop up the few homes available. That reality has also prompted questions about whether the Fed's vast moves to rescue the economy, even indirectly, propped up the housing market in a way that is cutting more people out.

Other snapshots of the consumer price index show how spending habits are changing as people resume their pre-pandemic spending habits. For example, the measure for "food away from home" - including restaurant food - rose 4.2% over the last year, the largest 12-month increase in that index since May 2009. The gasoline index also rose 2.5% over the month.

Tuesday's data release from the Bureau of Labor Statistics is unlikely to prompt any policy change from the Fed or Biden administration. One reason why is because prices in 2021 are being compared to those from 2020, when the pandemic caused the economy to shut down and prices fell.

A White House official said much of the price increases - including a huge share from used cars and steeper hotel costs - still revolve around ongoing supply issues. Asked about rising rents, the official said the administration was pushing for a major investments in the country's housing supply, which would help make housing more affordable for all Americans.

Federal Reserve Board Chair Jerome H. Powell is expected to face questions about the rise in inflation, how long it will last, and the Fed's response, when he testifies on Capitol Hill on Wednesday and Thursday. Powell has repeatedly said that a clearer picture on inflation will come with more time and more data. In the meantime, he pledges that the central bank is keeping a close watch.

"I think we have to be humble about our ability to understand the data," Powell said last month. "It's not a time to try to reach hard conclusions about the labor market, about inflation, about the path of policy. We need to see more data."

The Fed's main policy tools revolves around interest rates. The Fed slashed rates to near zero at the beginning of the pandemic, and central bankers say they won't consider raising rates until there's been substantial progress in the labor market, which is still down 6.8 million jobs from February 2020.

As the labor market appears to be gaining steam, Fed leaders recently moved up their expectations for a rate hike in 2023. But first, the Fed will have to decide how and when to scale back its $120 billion a month in bond purchases. Some economists and policymakers are becoming especially critical of the Fed's ongoing purchases of agency mortgage-backed securities, arguing the housing sector doesn't need any more support.

"Chair Powell is going to have to further clarify and provide a definition of what transitory is to a public who is not sensitive to the ebb and flow of data," said Joe Brusuelas, chief economist at RSM. "He needs to talk to them about where they live."

Republicans and some prominent economists such as Lawrence H. Summers, however, argue that the higher prices are an urgent concern. They warn that the Fed's low interest rates and other supports for the markets are excessively juicing the economy - and that the Fed will have missed the mark by the time it decides to step in.

How Americans respond to rising prices in the meantime could make that target even harder to nail down.

"Let's say you started to see expectations creep up into troubling territory," said Strain, with the American Enterprise Institute. "The response . . . has always been, 'Hey, we have a Fed, and maybe the Fed can slow the economy without putting it into reverse. I'm just not super optimistic about that."

Published : July 14, 2021

By : The Washington Post · Rachel Siegel