Notice the price of eating out, clothes and gas going up in the last year? It’s not your imagination.
In May, the Bureau of Labor Statistics announced a 5 percent annual increase in the Consumer Price Index (CPI), a measure of price changes for urban consumers buying goods. The bump was fueled by increases in the price of many items, including beef, airline tickets and full-service meals at restaurants. That’s the highest one-year jump since August of 2008. In the Twin Cities, the CPI rose nearly as much, by 4.6 percent, over the course of the year.
Such a large increase in the CPI, which usually rises roughly 2 percent per year, has stoked some fear of continued faster inflation in the prices of goods to come — a situation where consumers lose buying power as costs rise quickly, and in some cases, unpredictably.
The question now is whether increases in prices are a hangover from the pandemic or if they’ll continue to climb.
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Measuring inflation
When economists talk about inflation, they’re talking about a general tendency of the prices of things consumers buy to go up, said Mark Wright, senior vice president and director of research at the Federal Reserve Bank of Minneapolis.
It’s not intended to capture, say, the morning, noon and night changes in the price of gas, or the seasonal changes in the price of avocados.
“The key point is there’s a general increase,” Wright said. “It’s not going to happen exactly the same way for every product.”
Inflation happens for all sorts of reasons: It can happen because the cost of making products has increased; because of a surge in demand for products; because of a hot housing market, the effects of which ripples into construction and other related costs; or because of expansionary fiscal policy, which puts more money into people’s pockets to chase goods, driving demand.
Some level of inflation is normal, but when consumers who are accustomed to slow and steady price increases — as the U.S. has been for a long period of time — start to see bigger jumps, budgeting can start to feel a bit chaotic.
“If I’ve got a certain salary and I’m not really aware of inflation, and I’m kind of living paycheck to paycheck, [if] inflation is, instead of 1 percent, it’s 10 percent, that means by next year, I only have 90 percent of the [purchasing power for] food, the rent, other kinds of things,” said Mark Bergen, a professor at the University of Minnesota’s Carlson School of Management.
In the U.S., prices have remained relatively stable — only increasing gradually most years. The last significant period of faster inflation was in the 1970s. A blip of quicker inflation between 2007 and 2008 smoothed out more quickly.
Consumer Price Index, 1950-2020
Source: Federal Reserve Bank of St. Louis
For consumers in the Twin Cities, some of the biggest year-over-year increases in the consumer price index are in the price of fuel for vehicles, of used cars and trucks, and of gas for heating and cooking at home. But there have also been increases in the cost of all sorts of other goods, including clothing, furniture, eating out and buying groceries.
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Data from the BLS show Midwesterners living in urban areas have seen a roughly 60 percent increase in the average price of unleaded gas per gallon, from $1.79 to $2.87, since May 2020, a 10 percent increase in the cost of a bottle of wine, from $10.60 to $11.70 and a 6 percent increase in the cost of a pound of bacon from $5.90 to $6.20.
For economists, the question right now is whether price hikes for different goods are a temporary artifact of the pandemic — which completely changed consumer buying patterns, messed up global supply chains and injected cash through stimulus and other programs into consumers’ pockets, upping demand for some goods — that are bound to work themselves out, or whether some of the increases are likely to continue.
Bergen said many of the cost increases are likely temporary, but others might not be.
“What worries me are some of these longer-term macroeconomic factors,” he said. For example, the federal deficit has increased significantly.
“I don’t see the spending decreasing; I don’t see tax policies that are likely to be enough to cover the size of the deficit,” he said.
Last month, the Federal Reserve decided not to raise interest rates despite some raising alarms about potential inflation. The Fed is charged with using monetary policy to keep prices stable over time, and raising interest rates up from their historically low levels could constrict the amount of cash in the economy, which could slow inflation.
“We will not raise interest rates pre-emptively because we fear the possible onset of inflation. We will wait for evidence of actual inflation or other imbalances,” Fed Chair Jerome Powell said in a hearing before a Congressional panel last month.
Wright said more concern would come if prices were increasing without an obvious explanation. But, he said, right now, some of the biggest cost increases in 2021 relative to 2020 are in items that dropped in cost during the pandemic.
The U.S. CPI for airline fares, for example, has risen quickly — 24.1 percent between May 2020 and May 2021. But last May, the U.S. was in the thick of the COVID-19 pandemic, and few people were flying, so airline tickets were very inexpensive. The same could go for things like hotel rooms and cruise ship vacations.
Then there are other supply-chain issues that have driven up costs relative to a year ago but are likely to taper off before too long. The ship that blocked the Suez Canal in March slowed down the global supply chain, Wright said. Water-use restrictions because of a drought in Taiwan have caused a slowdown the production of semiconductors (which is water-intensive) and certain chips used to make new cars, driving up their cost. The alternative — buying used cars — has also become pricier as rental car fleets stopped offloading their slightly used vehicles onto the used car market as quickly as they usually do during the pandemic.
“The key is that we expect those price increases to go away once chip production expands, once more cars can be produced. We think that’ll change,” Wright said.
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And even though some price increases may be more long-term, they may not continue to rise for long.
“There could be some permanent price increases that result from changes in the way we do things, whether it’s because we now consistently provide a more hygienic experience,” he said, for example in a restaurant or hotel that would lead to higher prices. “But I do want to stress, just because prices rise and stay high, that doesn’t mean inflation stays high. That means you get like a one-off burst of inflation as prices rise.”