U.S. inflation showed some cooling off in July after posting large gains in prior months. Consumer prices rose at their slowest monthly pace since February, providing some relief to those in the “transitory” camp, who hold that this bout of inflation isn’t a long-term phenomenon.
While it’s unclear when inflation could return to a level closer to its 2 percent long-term trend, economists are increasingly talking about a gradual slowdown in inflation in the months and quarters ahead.
In a recent note, Goldman Sachs economists state that current levels of inflation will prove transitory, although a rapidly tightening labor market poses a risk as it could “translate into more persistent inflation pressures down the road.”
A swift rebound in the economy and a tight labor supply have returned the upper hand to American workers. Employers are competing to attract qualified candidates by raising wages and offering bonuses and other perks.
Companies are passing along these higher labor costs to consumers via price increases, hence adding to the inflationary pressures. And a record level of open job positions in the country suggests that businesses may continue to raise wages to attract people, which could in turn boost consumer prices further.
The survey also found that 52 percent of small business owners raised the prices of their goods and services to mitigate higher costs.
Supply Chain Constraints
In addition, the COVID-19 Delta variant is deepening already substantial supply chain disruptions, putting pressure on prices. For example, setbacks in the Asia-Pacific region, according to Goldman Sachs, are delaying the normalization of car prices.The semiconductor shortage amid the pandemic continues to hammer auto production worldwide. Nissan announced on Aug. 10 that it would close its large factory in Tennessee for two weeks because of computer chip shortages. More than a dozen factories in North America and Europe have halted or reduced operations in recent weeks.
The global scarcity of chips has tightened new and used vehicle inventories and pushed up prices this year. Prices of new and used vehicles have been on the rise for months, making them a major driver of inflation.
How Sticky Is Inflation?
Inflation has turned into a major source of disagreement among economists, as they are divided over the key question of how long high inflation could stick around.“The risk is that higher inflation may have a longer-than-expected ‘tail’ before normalizing, or perhaps a more enduring structural component,” Nanette Abuhoff Jacobson, global investment strategist at Hartford Funds, said in a report.
One area to watch closely, she said, is rents and shelter, the largest component in the consumer price index.
“We’re going to head into a very high rent period in the next 10 years,” Ken McElroy, CEO of MC Companies, a real estate investment firm, said in an interview.
If rents track home prices as in the past, then this could be “a big deal” for inflation, according to Jacobson, as shelter costs have historically lagged home prices by around 18 months.
Excessive government stimulus and ever-growing national debt are also fueling inflation fears. The International Monetary Fund warned in July that more fiscal spending could increase inflationary pressures in the United States, pushing the Federal Reserve to take preemptive action.
“I’m surprised that people in Washington don’t get this,” conservative economist Stephen Moore said in an interview, criticizing fiscal spending and the Fed’s ultra-accommodative monetary policy.
The White House, however, is pushing back against these concerns, saying that Biden’s Build Back Better policies would address “long-standing cost pressures” facing families.