Inflation Has Arrived, But Washington Is Not Competing To Limit Price Pops

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Prices rose more than Fed officials expected, according to both their public statements and their statements. economic projections from earlier this year.

Why the big jump? Some owe it to temporary data quirks that are expected to push inflation even higher this year. Part of this came as airfare, hotel rooms and other purchase prices affected by the pandemic also recovered from last year, as expected. But surprisingly much of the increase came from increased consumer demand, which strained delivery routes and exceeded current supply for electronics, residential and washing machines.

This portion of inflation is more dependent on government policies that put money in consumers’ pockets, and its future trajectory is much less predictable. Economists think the bottlenecks will go away, but it’s unclear how much and for how long.

Whether today’s inflation is significant and warrants a response will depend on several factors.

If rapid price increases subside as the economy returns to normal, as the White House predicts, they shouldn’t be too much of a problem. Households will likely have to spend a little more on certain goods and services, but they may also find that they earn more. Workers are now seeing decent wage increases, albeit not enough to outpace price increases, and the labor market is expected to continue to strengthen as inflation falls.

The largest price increases were also concentrated in just a few categories, such as used cars. Most families don’t buy cars this often, so the impact of higher costs won’t be as noticeable to consumers as an overall rapid increase in the prices of everything they buy, such as clothing and milk.

But if consumers and businesses begin to expect higher prices and begin to accept larger price tags and demand higher wages, this could drive inflation and keep it high. That would be a problem. Rapid inflation makes life difficult for people living on savings, such as retirees. If salary exceeds earnings, it can erode the consumer’s ability to purchase goods and services. And if inflation becomes harder to predict, as it was in the 1970s and 1980s, it makes it harder for businesses and households to plan for the future.

There are real reasons to worry that inflation may hold steady. Supply chain woes are expected to subside over time, but new strains of Covid and renewed quarantines in some countries may prevent global trade chains from returning to normal. This can keep the prices of goods high. (On the other hand, Harvard’s Jason Furman points out that renewed quarantines will likely drag down consumer demand, which could lead to softer price pressures.)

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