The Economist - USA (2021-07-10)

The Economist July 10th 2021 BriefingInflation 23

threefold.  The  first  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 inflation 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  four­fifths  of
core­inflation 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  find  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 inflation may have peaked. In­
flation  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—inflation falls. If
prices fall back again, as American lumber
prices  did  by  a  spectacular  40%  in  June,
base effects go into reverse, lowering head­
line inflation. 
The increase in demand which drove up
demand for durable goods in the first 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  different

things. With services reopening, those

consumersflushwithcashfaceachoice

betweenpayinghighpricesforgoodsthey

havebeenabletobuythroughoutthepan­

demicandbuyingthekindofexperiences

ofwhichmanyhavebeenstarvedforal­

mosttwoyears.Theychoosethelatter.

A newhope

In inflationterms, this shift may push

economiesoutofthefryingpanandinto

thefire.Highdemandforhotels,transport

andrestaurantmealsmeanslotsofcompa­

niesneed workers.Andtheworkersare

gettingpricey.

Despitegrowingbynearly350,000jobs

inJune,America’sleisureandhospitality

isstillonlyseven­eighthsasbigasitwas

before the pandemic in employment

terms.Workersforwhom$2,000instimu­

luspaymentsearlierthisyearandextend­

edunemploymentinsurancemadeabig

difference find themselves in a seller’s

market.Wagesinleisureandhospitality

jobsarenearly8%higherthaninFebruary

lastyear;jobopeningsareabundant.Res­

taurantsandhotelstendtohavelowprofit

margins:wherewagesgo,pricesarelikely

tofollow.

AccordingtoJPMorganChase,average

servicespricesacrosstheworldarestillbe­

lowtheirpre­pandemiclevel.Closingonly

halfthatgapinthesecondhalfofthisyear

wouldaddapercentagepointtoaverage

headlineinflation.Insomeplaces,though,

labourcostslooklikeeliminatingthegap

completely, andthen some. In America

medianworkersrequirea 3%higherwage

toaccepta jobthantheydidbeforethepan­

demic,accordingtoa recentsurveybythe

NewYorkFed.Forlow­wageworkersthe

necessarywagehasgoneup19%.

Americaneconomistshavefloatedlots

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

ploymentbenefits.Itseems strangethat

youngwaiters, whocouldbe vaccinated

shouldtheysochoose,wouldseetheres­

taurantstowhichconsumersarehappyto

returnastooriskytoworkin.A newpaper

byJasonFurmanandWilsonPowellIIIof

HarvardUniversityandMelissaKearneyof

theUniversityofMarylandfindsthataddi­

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

benefitsnoneoftheputativecausalfactors

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

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