The challenge of post-pandemic inflation

In 2021, as vaccines have allowed activity to resume, a chaotic combination of factors, ranging from government stimulus and Federal Reserve accommodation, to supply chain hiccups and fear of the virus, have led prices of some goods to skyrocket. Other companies have sought to recoup losses from closures in 2020. That led to increases in inflation that outstripped what many forecasters expected. Federal Reserve chair Jay Powell’s  plans to emphasize full employment and tolerate slightly higher inflation immediately came under pressure.

Still, much of the change was driven a few big categories, particularly cars, which were hard hit by shortages of silicon chips, and energy costs as global demand returned to oil markets. Supply chains hiccups made durable goods like housewares and electronics harder to get, even as more people wanted to buy stuff when they couldn’t spend on services. But even as inflation peaked in June, efforts to look behind these categories, like the Cleveland Fed’s median CPI measure, showed far more more modest increases.

The 2021 boost in prices may not be over. In this case, the pandemic giveth, and the pandemic taketh away: The rise of the delta variant and corresponding precautions and fears is playing a big role in the economy, as we saw in August’s employment numbers, which came in significantly below expectation. Economists see similar dynamics at play in the price index, noting that the cost of airline tickets and hotels fell. That could mean that as vaccination rates increase and, knock on wood, more normalcy returns, inflation will continue to increase.

The supply chain problems that need to be solved

The problem for policymakers is that much of the problem with prices comes from the supply side—there are more people who want to buy goods of all kinds than goods for them to buy. This is tough to address for the Federal Reserve, which could fight inflation by tightening monetary policy and reducing demand. In effect, it would mean putting people out of work and making credit harder to come by, so that fewer people will be able to buy more stuff. It might solve the inflation problem, but it’s not exactly ideal.

To avoid that fate, policymakers need to think harder about the global supply chains that provide many of the inputs for goods bought in the US. As former Federal Reserve economist Claudia Sahm pointed out recently, the increase in prices of durable goods is notable because of how much their costs have fallen for US consumers thanks to globalization:

Now, though, the pressures of geopolitics, public health restrictions, and old fashioned protectionism have crimped that firehouse of cheap stuff from abroad. If the US is really going to turn the corner on price increases, more attention will have to be paid to this problem, and America’s creeping retreat from the global economy.

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