For the first time in decades, the U.S. is confronted with the problem of inflation, as all service center executives are keenly aware. But will 2021’s price hikes carry over into our post-pandemic existence, or will the rising price environment peter out?
The Conference Board addressed that issue in a January media briefing. And the group concluded that above average inflation will persist into and potentially through 2023, even with efforts by the Fed to tamp it down.
“Inflation in the U.S. is rising very quickly. It’s everywhere. It’s in goods, services, commodities, producer prices even in housing,” said Dana Peterson, executive vice president and global chief economist for The Conference Board.
Peterson explained the current environment is a byproduct of both temporary factors, many brought on by the pandemic and its aftermath, and more persistent issues.
The temporary factors that have triggered price increases include fiscal policy, strong demand for goods, robust demand for housing, supply chain bottlenecks, transportation costs and labor shortages. Many of them are tied to conditions brought upon by the coronavirus.
Goods prices have escalated due to high consumption, as individuals had less opportunity to spend on services. Housing prices spiked as millennials looked to move out of cities, and factory closures abroad due to localized outbreaks have contributed heavily to supply chain constraints.
Other temporary factors include energy price volatility, the semiconductor shortage and transportation issues.
“Even if you can produce the product, it’s difficult to get it to the U.S., and once it reaches the port there’s no one to offload it, and once you offload it, there aren’t enough truckers,” Peterson said. “All of these things are interconnected.”
And while the semiconductor shortage is a temporary phenomenon, it’s not going to be solved overnight due to the length of time it takes to build a new chip plant as well as the ongoing demand spike from virtually every industry.
Structural issues also contribute, some a reflection of the change in the way business is done and others the product of policy decisions. The transition to renewable energy, for instance, may ultimately lead to reduced costs, but it will likely spike prices while getting there.
Additionally, policy changes in response to the pandemic, such as reshoring to relieve bottlenecks and industrial policies that protect against foreign goods, will also serve as an upward pressure on pricing.
The labor issue is also likely to be persistent. The U.S. is aging rapidly, with a wave of people retiring and without the strong younger demographic to fill in, a problem that plagues Europe, Japan and China as well. And one potential remedy to that issue is largely closed off.
“Immigration and mobility are great ways to help alleviate labor shortages. As long as you have tight immigration policies, it’s very difficult to tap into that foreign labor source,” Peterson said. “That leads to labor shortages, which are inflationary.”
Some factors may serve as a bulwark against rising prices, including automation, improved efficiency, technological advancements, greater supply and improved infrastructure. But the single biggest defense will likely be supplied by the Fed.
The Conference Board is projecting the Fed will announce five 25-basis-point rate hikes in 2022 in an effort to combat rising prices and push inflation back toward its 2 percent target.
Peterson said the signals from the Fed indicate concern with the real economy, not the financial markets.
“I think it’s very important the Fed lays it out and says, ‘Once we finish the taper of our balance sheet in March, we’re going to start raising interest rates, and we may raise interest rates several times this year.’ ”