EXPLAINER: Why are fears of high inflation getting worse?
Gas prices are rising
May 11, 2021, 10:54 PM
7 min read
Share to FacebookShare to TwitterEmail this articleFILE - In this Dec. 1, 2020 file photo, Chairman of the Federal Reserve Jerome Powell appears before the Senate Banking Committee on Capitol Hill in Washington. Powell says the economic outlook has “clearly brightened” in the United States but the recovery remains too uneven with lower income groups lagging behind. In a speech Monday, May 3, 2021 Powell cited a number of reasons that U.S. growth prospects have brightened. (AP Photo/Susan Walsh, Pool)
WASHINGTON -- Gas prices are rising. Auto prices are soaring. Consumer goods companies are charging more for household basics like toilet paper, peanut butter and soft drinks.
All of which is resurrecting fears of an economic threat that has all but disappeared over the past generation: Runaway inflation. It occurs when prices for most goods and services not only rise but accelerate, making the cost of living steadily more expensive and shrinking the purchasing power of Americans' earnings and savings.
Growing jitters about inflation have contributed to a sharp sell-off in stock prices this week. Any significant acceleration of inflation would exert a drag on the market and potentially imperil the economic recovery.
In the past, rising inflation has usually led to higher pay as workers have demanded and received raises to keep pace. In fact, inflation can't really accelerate for long without sizable wage gains. Yet pay raises — if they do occur — typically lag behind price increases, thereby squeezing consumers at least temporarily. And eventually, pay gains themselves will fuel further inflation: Companies raise prices further to offset higher wages for their employees.
Some companies, including Amazon, have recently raised or said they plan to raise wages.
Not since the late 1960s and early '70s has the United States endured chronic high inflation, with consumer prices rising at or near double-digit percentages from one year to the next. In fact, the reverse has been true for about a decade: Inflation has remained persistently below the 2% annual target set by the Federal Reserve. Under Chair Jerome Powell, the Fed is betting that it can keep rates ultra-low even as the economic recovery kicks into high gear — and that it won’t have to quickly raise rates to stop runaway inflation.
Few economists think the nation is on the verge of uncontrollably high inflation. But worries among businesses, consumers and investors about uncomfortably high inflation are growing.
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WHAT'S BEHIND THE CONCERNS ABOUT INFLATION?
Mainly, it's the fact that prices for so many things are rising and seem likely to do so for the next several months at least. One reason for that is that prices tumbled in March and April of last year, when the pandemic tore through the economy, and have since rebounded. As a result, year-over-year price increases now look much higher than most consumers are used to. The consumer price index rose 2.6% in March compared with a year ago, a significant rise from just 1.7% a month earlier. Analysts forecast that consumer prices will soar again in April when that month's figures are reported Wednesday, to a year-over-year reading of 3.6%. If that prediction is accurate, that would be the largest increase in nearly a decade.
Another factor is a widespread shortages of raw materials and parts that is magnifying costs. Builders can't find enough lumber to build new homes. Manufacturers are desperate for more copper and other commodities. Auto makers need more semiconductor chips. And some restaurants are scrambling for chicken wings.
Supply bottlenecks have occurred because companies were caught flat-footed by the speed of the economic recovery from the pandemic, with most consumers flush with cash, after multiple stimulus checks, and spending freely. With everyone now ramping up at once, manufacturers, shipping firms, miners and agricultural companies can't keep up.
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WILL AMERICANS' PAYCHECKS INCREASE, TOO?
