Qwick Takes: Cost increases across industries are fueling inflation
This week, Talking Biz News Deputy Editor Erica Thompson reached out to Qwoted’s community of experts to inquire about the effects of supply chain disruptions and soaring costs on small and medium-sized businesses.
Check out some of the top commentary:
Spiral is a strong word. However, yes, inflation could remain at 5 percent or even go higher. Since US inflation stems from two key causes—expansionary policy and economic impediments—the solution is to resolve the two. That means fiscal and monetary austerity and a complete reopening of the economy across all states and borders. Without those two problems resolved, pressure on prices from a devalued dollar will remain. Further, economists and the layman alike will raise their inflation expectations and generate inflation inertia. To make matters worse, should there be another negative economic shock, we would be in the midst of serious stagflation.
Rising costs and prices are the result of supply-chain disruptions and labor shortages. Dislocations were aggravated by a powerful, “V”-shaped economic cycle, encouraging a consolidation by businesses during the economy’s freefall that left them flat-footed when the economy came roaring back beginning last spring. Our view is that inflation will remain elevated through most of 2022, as dislocations filter through other parts of the economy.
Still to come are accelerated increases in rents, about 30% of the CPI and affected both by a general shortage of units and by a market readjustment after the exodus from core urban areas during the worst of the pandemic last year. Ultimately, we’re looking for inflation to subside from its current 5% rate as the market adjusts to the imbalances created by the pandemic and its aftermath. However, we expect inflation to steady, for a time, at about 2.5%-3% before moving a bit lower, still materially above its 1.7% p.a. average in the decade before the pandemic.
Despite the dominant effect on inflation from such transitory items such as new and used cars, lodging and transportation services such as airfare, there is a very real risk that higher inflation becomes embedded and sustains longer and at higher levels than expected.
Increased labor costs will translate directly into higher prices. The company that has to raise starting pay from $15/hour to $17/hour isn’t then going to go back and pay those same employees $15/hr next year. Rents are another one – the effect of rising home prices and higher rents are not yet reflected in the Consumer Price Index. But once that shows up, it won’t be transitory either – landlords don’t often reduce rent after they’ve increased it.”
The way to prevent further acceleration in inflation would be for the Fed to dial back the accommodation in a significant way right now – but they won’t do that for fear of undercutting the economic recovery. While the Fed says they have to tools to deal with inflation down the road if it does move too high, unfortunately they’d need to use them more aggressively the longer they wait and the more aggressively they move the sharper the economic fallout will be. The Fed is confident, or at least willing, to roll the dice that it doesn’t come to that. For now, it means we deal with higher inflation and hope it proves transitory, or know that it’ll mean a rougher ride later.