Some, but Not All, of the Price Jump Is Transitory
May 12 2021 - 1:49PM
Dow Jones News
By Greg Ip
The surge in prices in April was a shocker. Excluding food and
energy, the core index rose 0.9% from March, the biggest one-month
increase since 1981, and three times more than Wall Street
expected. This was as surprising as the subdued April payroll
increase reported just five days earlier.
The 12-month core inflation rate jumped to 3%, the highest since
1995. This was partly due to "base effects" as price drops in April
2020, when pandemic closures were taking effect, exited the
12-month calculation. But base effects cannot explain the
March-to-April jump.
Subdued jobs growth and strong price increases in April together
suggest resurgent demand, fueled by vaccinations, stimulus checks
and low interest rates, is bumping up against sluggish supply.
Some of this is clearly transitory and will reverse once the
economy is fully reopened. At this point it's impossible to tell
how much, but there are signs that at least some isn't
transitory.
Three broad trends are apparent, as illustrated by airfares,
used cars and restaurant meals.
Returning to normal: Airfares jumped 10% in April from March,
but since February 2020, airfares are still down 15% at an
annualized rate. Thus, April's increase simply reflects a
pandemic-sensitive industry slowly returning to normal. It isn't
worrisome.
Transitory: Used-car prices leapt 10%, and are up 18% annualized
from pre-pandemic levels. Used cars didn't somehow become more
expensive to make. But supply has shrunk and demand exploded as
people unable or unwilling to use public transit hold on to their
cars or try to buy one.
Thus, the rise in the used-car price simply represents a
temporary windfall profit to those lucky enough to have a used car
to sell. Eventually, demand will fall back and supply will catch up
and those windfall profits and prices will disappear.
Rising costs: Prices of food away from home -- mostly restaurant
meals -- rose only 0.3% but this may actually be the most worrisome
category of all. First, you would have expected the battered
restaurant sector to have slashed prices, just like airlines, when
the pandemic began. That didn't happen. In fact, prices have risen
at a 3.6% annualized rate since February 2020, notably faster than
the 2.7% average over the prior five years.
What sets restaurant meals apart from airfares and used cars is
that the primary input is labor (along with food and rent). Labor
has gotten more expensive: wages rose a hefty 0.7% in April. In
leisure and hospitality they jumped 1.6% and are up 5% annualized
since February 2020, increases that are highly unlikely to
reverse.
This is great for restaurant workers who are among the
lowest-paid of any sector and endured a lot of stress from dealing
with the public during a pandemic. Nonetheless, someone has to
absorb these costs and it looks like consumers will. These aren't
trivial expenditures, either: Food away from home accounts for 6.3%
of the consumer-price index, compared with 2.8% for used vehicles
and 0.6% for airfares.
The biggest category of all is shelter, where the outlook is
especially tricky. Homes have gotten a lot more expensive but
shelter inflation is based on rents, and those rose just 0.2%, for
both owners and tenants, in April. Both are running at around 2%
annualized since February, 2020, lower than in preceding years.
Still, economists expect rental inflation to pick up as the job
market tightens, and that, too, is unlikely to be transitory.
So far, the Federal Reserve isn't inclined to rethink its plan
to keep interest rates near zero for a few more years. In a speech
Wednesday vice chairman Richard Clarida said he expected base
effects and bottlenecks to temporarily push inflation above the
Fed's 2% target this year. "However, under my baseline outlook,
these one-time increases in prices are likely to have only
transitory effects on underlying inflation." He expects inflation
to drop back to, or somewhat above 2% in 2022 and 2023.
Whether that happens will depend a lot on whether the behavior
of restaurant wages and prices is isolated, or the shape of broader
inflation to come.
Write to Greg Ip at greg.ip@wsj.com
(END) Dow Jones Newswires
May 12, 2021 13:34 ET (17:34 GMT)
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