5 min read.Updated: 10 Nov 2021, 07:10 PM ISTGwynn Guilford, The Wall Street Journal
Economists estimate prices rose at the fastest pace since 1990 as supply constraints kept boosting costs
US inflation likely hit a three-decade high in October, pushed up by pandemic-related supply shortages and continued strength in consumer demand.
Economists surveyed by The Wall Street Journal estimate the Labor Department will report the consumer-price index—which measures what consumers pay for goods and services—rose 5.9% in October from the same month a year ago. That would mark the fastest pace since 1990 and the fifth straight month in which inflation topped 5%.
They also forecast that the so-called core price index, which excludes the often-volatile categories of food and energy, in October rose 4.3% from a year earlier. That would be a faster rate than September’s 4% increase and closer to June’s 4.5% reading, which was the highest since 1991.
On a monthly basis, the CPI likely climbed a seasonally adjusted 0.6% in October from the prior month, a sharp acceleration from September’s 0.4% rise, though down from June’s 0.9% pace.
Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives, thinks the U.S. is entering a six-month period of unusually high inflation.
“I do think we’re moving into a new phase where inflation is broader and where things are going to get a little more intense," she said. “Part of that reflects that [supply-chain] bottlenecks are not resolved going into the holiday season, when a lot of purchases get made, and that the economy is doing really well, so you have strong demand."
Ms. Rosner-Warburton sees a shift under way in which a wider range of factors will push up inflation, as opposed to the previous months’ increases, which were driven disproportionately by skyrocketing vehicle prices and the reopening of services after Covid-19 vaccines became available. “Part of [this] still seems likely to be transitory, but maybe not all of it," she said.
Federal Reserve officials are closely watching inflation measures to gauge whether the recent jump in prices will be temporary or lasting. One such factor is consumer expectations of future inflation, which can prove self-fulfilling as households are more likely to demand higher wages and accept higher prices in anticipation of higher future price growth.
Consumers’ median inflation expectation for three years from now stayed at 4.2% in October, the same as in September, according to a survey by the New York Fed. That level is the highest since the survey began in 2013.
Unusually high demand—boosted by a long stretch of government stimulus and an improving job market—is a crucial factor driving higher inflation.
Consumer spending increased at an annual rate of 1.6% in the third quarter, a sharp slowdown from a 12% increase in the prior quarter. However, much of that deceleration was due to scarcity of new cars and other durable goods. Consumer spending on services last quarter climbed at the brisk annual rate of 7.9%.
Covid-19 continues to be a wild-card factor. The outbreak of the Delta variant put downward pressure at the end of the summer on prices for travel, recreation and other services that involve close interaction. Spending on services has bounced back in recent weeks as coronavirus infections fell, which could put further upward pressure on prices.
Companies are struggling to get materials and are delaying orders as elevated demand for goods due to pandemic spending habits has collided with transportation bottlenecks, production disruptions from Covid-19 and labor shortages. The most prominent example is a shortage of semiconductors that has hamstrung auto production. Limited supply of new autos has driven up prices for both new and used vehicles.
The chip shortage, which has also affected other industries, has worsened because of shutdowns of factories and ports in Asia in response to Covid-19 outbreaks.
Supply disruptions go far beyond the semiconductor shortage, creating scarcity for a range of materials affecting companies throughout the chain of production. A separate shortage of available workers is also affecting inflation and the overall economy, said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics.
“The bigger picture is we’re likely to see inflation climb higher," she said. “Things are going to get worse before they get better."
Many companies are passing on higher costs to consumers. In October some 53% of small businesses raised prices, on net—a level last seen in the early 1980s—according to the National Federation of Independent Business, a trade association.
The shortage of workers to meet consumer demand is also putting upward pressure on wages, pushing companies to raise prices to offset higher labor costs. The sharp uptick in restaurant prices during the past few months is a sign of this pass-through from wages into higher prices, economists say. That dynamic is increasingly showing up in other sectors.
Higher food and energy prices—driven up by pandemic-related production problems as well as by weather and geopolitical factors—are also adding to the upward pressure on inflation, said Richard F. Moody, chief economist at Regions Financial Corp.
“All these things are being rolled into prices we pay at the grocery store," he said.
The relentless and rapid rise in prices throughout the economy has left companies scrambling to keep up.
Tom McTaggart, a pricing consultant and the founder of PricingAudit.com, said he began sensing a sustained rise in supply-chain-driven inflation during the summer. His billable hours had surpassed those for all of 2020, itself a record-breaking year for his business. Demand for his services has surged as his clients have struggled to preserve their margins.
“It’s a never-ending loop—by the time you’ve implemented one price increase, you’re already ready to implement a new one," said Mr. McTaggart, who is based in Philadelphia. “It’s like trying to hit a moving target while you’re standing on a moving platform."
Mr. McTaggart said firms are slammed by business from existing customers and have no spare capacity to try to gain market share from rivals, something firms sometimes can do during periods of high demand. He added his clients’ accounting systems aren’t designed to update such a range of rapidly rising costs. And since it can take a while for these price changes to trickle through the supply chain to the consumer, Mr. McTaggart expects there will be more pressure on consumer prices to come.
“The kind of price increases I do take time to flow through to consumers—color that goes into tubes, or the wire that goes into a dishwasher," he said. “It’s almost like a wave—it could take a year to get to the end consumer."
Economists generally expect upward pressure on inflation from supply constraints to fade over the next year as consumer demand for goods eases, production ramps up and sidelined workers return. However, they also anticipate those to be replaced by sources of price pressure such as rent and medical care that tend to be more persistent—and that therefore are key to anticipating inflation’s future path. Rent is particularly important because it accounts for nearly one-third of the CPI index. After remaining subdued for most of this and last year, rental costs have started to accelerate.
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