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Americans’ #1 economic concern, according to a recent survey from the Pew Research Center, is about rising prices, especially for food and consumer goods, regardless if you’re a “steak or fake” diner.
Not to worry, reassures William Gatson in the WSJ, for those who don’t have a doctorate in economics. It is not needed to understand when “rising demand meets too little supply, the result is inflation.”
If structural changes turn out to be the main cause, Americans shouldn’t expect the consequences—higher prices at the store—to be “transitory.”
Higher Prices Easy to Explain
Consumer inflation is running above 5%, wiping out nominal wage gains for low-income workers. The Labor Department reports that businesses investing in their long-term production capacity are facing the largest price hikes since 1982.
The Federal Reserve’s and the Biden administration’s official position is that the inflationary spurt is transitory and will abate next year to a more sustainable growth around the Fed’s 2% target. Admitting that inflation has pushed higher and lasted longer than they expected, they assure Americans that as “the U.S. emerges from economic distortions created by the pandemic, high inflation will fade from view.”
Maybe yes and maybe no, argues Mr. Galston. “There are many factors pointing in the opposite direction representing “structural changes in the U.S. and world economy.”
The Federal Reserve pays careful attention to the public’s expectations about the future rate of inflation; these expectations shape behavior and can become self-fulfilling prophecies. The goal is to have these expectations “anchored” at around 2%. But according to the New York Fed’s August survey, consumers expect inflation to run at 5.2% in the coming year and at an average of 4% for the next three years.
No Surprise: Rentals/Home Prices Soaring
Transfers to individuals during the pandemic fed a huge increase in personal savings, and this pent-up demand is bumping up against supply-side limits. Home and apartment builders, for instance, face not only a shortage of skilled workers but also zoning and regulatory codes that limit their ability to build and renovate in places where Americans want to live. No surprise, then, that home prices and monthly rentals are soaring, with Fannie Mae predicting shelter inflation at 4.5% or more for years to come.
Unskilled workers who left the employment files but return will face new obstacles, including a mismatch between skills and jobs, continues Mr. Galston.
The post-pandemic economy is demanding more workers in transportation and warehousing, while needing fewer in food service. Resolving such mismatches will take time, even if retraining programs work well, which they often don’t. And looking further down the road, the rate of increase in the labor force has slowed to a trickle, as has the flow of new immigrants, who have been essential to bolstering the labor force.
Then there are shortages of semiconductors, which have become key components of automobiles and electronics. Most automakers have announced production cuts, leading to shortages at car dealers and high prices for consumers. There are no closed plants to reopen; the world’s semiconductor industry is running at capacity, and dependence on production in China and Taiwan is increasing. Building new production facilities to this industry’s exacting specifications will be costly and time-consuming, as will shifting new production capacity to mitigate rising risks of depending on China.
Semiconductors Part of Larger Story
In recent decades, corporations have become dependent on global supply chains to keep the prices of labor and materials down and to maintain lean inventories, further reducing costs. The pandemic, protectionism and global tensions are forcing them to reconsider this strategy. But moving away will take time and raise costs.
Global Supply Chain Bottleneck
According to a WSJ report,” ships are waiting offshore to unload as containers pile up in ports.”
Shortages of equipment, trucks, drivers and warehouses are slowing the movement of goods from ports to businesses. Requiring employees to work overtime raises labor costs, spurs resignations, and often bumps up against safety and union requirements.
Amid the vortex of these developments, writes Mr. Galston, “businesses—from Costco and FedEx to neighborhood restaurants—have been able to pass the higher prices they are paying for goods and services on to consumers without encountering resistance or losing market share.”
Not Just Costco or FedEx
Dollar Tree, whose entire brand is based on every item priced at $1 or less, recently announced it is raising prices above $1 on “selected items” in all stores.
Biden would have the public believe that inflation is not embedded in general prices. Is Joe Biden not paying attention?
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