The Economist July 10th 2021 BriefingInflation 23
threefold. The first is a boom in demand
for goods like cars, furniture and house
hold appliances set off by consumers
splurging on things that made lockdown
homes nicer and life outdoors more enjoy
able. The second is disruption in the global
supply of some of those goods. A shortage
of microchips, for example, is severely cur
tailing the supply of cars. A higher oil price
(see Finance section) does not help. Dis
ruption in the global shipping industry
and at ports exacerbates things in various
markets. The third—probably the most im
portant, and the one only now fully com
ing to be felt—is a rebound in the prices of
services. Consumers are returning to res
taurants, bars, hairdressers and other in
person businesses faster than workers are.
America is seeing higher inflation than
anywhere else primarily because, having
seen the largest economic stimulus, it saw
the greatest durablegoods boom. Accord
ing to the index of prices targeted by the
Fed, cars, furniture and sporting gear were
responsible for more than fourfifths of
coreinflation overshoot in May (see chart
3 on next page). Europe’s supply chain fac
es the same issues as America’s, but with
demand more modest, durable goods sen
sitive to the disruptions were only 1.5%
more expensive in May than they were a
year earlier, according to Morgan Stanley.
For how long will engorged demand
come up against constrained supply? The
experience of 2020 showed that supply
chains could find a way around some is
sues—such as shortages of toilet roll and
diagnostic tests—relatively quickly. The
trouble is that microchip supply and ship
ping capacity are relatively slow to adjust:
expanding capacity requires investment in
fabs and ships. Firms report that they ex
pect delivery times to be longer, not shor
ter, in six months’ time.
But though some of the problems will
persist, the contribution of durablegoods
shortages to inflation may have peaked. In
flation is the rate at which prices change,
not a measure of how high they are. If pric
es stay high but stop rising—or even just
slow the rate of their rise—inflation falls. If
prices fall back again, as American lumber
prices did by a spectacular 40% in June,
base effects go into reverse, lowering head
line inflation.
The increase in demand which drove up
demand for durable goods in the first place
is also dropping. This is not because people
are running out of money. During the pan
demic overall household spending went
down, even though stimulus measures
preserved or increased incomes. In Ameri
ca the resultant wedge of excess savings
stands at around $2.5trn, or 12% of gdp.
The equivalent in the euro area was 4.5% of
gdpat the end of 2020. It is unlikely to have
fallen much yet.
It is, though, being spent on different
things. With services reopening, those
consumersflushwithcashfaceachoice
betweenpayinghighpricesforgoodsthey
havebeenabletobuythroughoutthepan
demicandbuyingthekindofexperiences
ofwhichmanyhavebeenstarvedforal
mosttwoyears.Theychoosethelatter.
A newhope
In inflationterms, this shift may push
economiesoutofthefryingpanandinto
thefire.Highdemandforhotels,transport
andrestaurantmealsmeanslotsofcompa
niesneed workers.Andtheworkersare
gettingpricey.
Despitegrowingbynearly350,000jobs
inJune,America’sleisureandhospitality
isstillonlyseveneighthsasbigasitwas
before the pandemic in employment
terms.Workersforwhom$2,000instimu
luspaymentsearlierthisyearandextend
edunemploymentinsurancemadeabig
difference find themselves in a seller’s
market.Wagesinleisureandhospitality
jobsarenearly8%higherthaninFebruary
lastyear;jobopeningsareabundant.Res
taurantsandhotelstendtohavelowprofit
margins:wherewagesgo,pricesarelikely
tofollow.
AccordingtoJPMorganChase,average
servicespricesacrosstheworldarestillbe
lowtheirprepandemiclevel.Closingonly
halfthatgapinthesecondhalfofthisyear
wouldaddapercentagepointtoaverage
headlineinflation.Insomeplaces,though,
labourcostslooklikeeliminatingthegap
completely, andthen some. In America
medianworkersrequirea 3%higherwage
toaccepta jobthantheydidbeforethepan
demic,accordingtoa recentsurveybythe
NewYorkFed.Forlowwageworkersthe
necessarywagehasgoneup19%.
Americaneconomistshavefloatedlots
ofpossibleexplanationsforthereluctance
manypeopleareshowingtowardsjobsof
feredforprepandemicwagesandunder
prepandemicworkingconditions.Some
blame America’s unemployment insur
ancetopupsandthinkwageswillstopris
ingwhentheyexpireinSeptember(they
have already been curtailed in some
states). Others suggest that restaurant
workersareunwillingto returnto such
jobswhilethevirusisstillatlarge,orthat
schoolclosuresareleavingworkersstuck
withoutchildcare.
Noneoftheseexplanationsisfullysat
isfactory.BritainandAustraliaarealsosuf
fering worker shortagesin someindus
tries,despitenothavinggenerousunem
ploymentbenefits.Itseems strangethat
youngwaiters, whocouldbe vaccinated
shouldtheysochoose,wouldseetheres
taurantstowhichconsumersarehappyto
returnastooriskytoworkin.A newpaper
byJasonFurmanandWilsonPowellIIIof
HarvardUniversityandMelissaKearneyof
theUniversityofMarylandfindsthataddi
tional joblessness among mothers of
youngchildrenaccountsforonlya “negli
gible”shareofAmerica’semploymentdef
icit,contrarytotheconventionalwisdom.
Somespeculateoncauseswithwhichit
isharderforeconomiststogettogrips.The
psychological caesura of the pandemic
mayhavegivenpeoplethetimetowonder
whatsortofworktheywanttoreturnto,
provokingsoulsearchingandcuriousfor
aysintonewterritory.Presumablyatsome
point such jobchangers will return to
work,if perhapsinothersectors.Butwhen
thatmightbeisnotclear.Indeed,withthe
exception of enhanced unemployment
benefitsnoneoftheputativecausalfactors
providesa strongsenseofhowlongthesit
uationwilllast.
Anotherpricewithplentyofroomto
runisrent.Duringthepandemiclowinter
estratesanda demandformorespacetrig
geredanextraordinaryhousepriceboom
acrosstherichworld:inAprilAmerican
homeswere14.6% moreexpensivethan
theyhadbeena yearearlier.YetinAmeri
ca,theeuroareaandBritainrentsremain
beneaththeirprepandemictrend;inAus
traliarentshavefallenthroughoutthepan
demic.Rentersaremorelikelythanhome
ownerstohavelosttheirjoboverthepast
year,andrentsarehighlycyclical,moving
withthefortunesoftheeconomy.Butas
Making up for lost time
Consumer prices, June 2019=100
Source:RefinitivDatastream
*Personal consumption
expenditures index
1
2%annual
growthtarget
105
104
103
102
101
100
99
98
2019 20 21
Euro area
Japan
Britain
United States*
Didn’t see that coming
Citi Inflation Surprise index
Source:Bloomberg
↓Inflationlowerthanexpected
↑Inflationhigher
thanexpected
75
50
25
0
-25
-50
-75
1999 2005 1510 21
United States
Global