Recreation & Entertainment
If you held off on a home expansion when lumber prices bounded higher this year, you’re probably in good company. After years of hovering between $300 and $400 for 1,000 board feet, lumber costs skyrocketed when the pandemic began to ease, reaching a vertigo-inducing $1,700 in early May.
It wasn’t just lumber. Prices for cars, both new and used, soared alongside those of more prosaic goods such as pork and red meat. The consumer price index (CPI), which tracks the costs of everyday expenses ranging from rent and gas to food and water, blazed higher in the first half of 2021, with May prices up 5% from a year ago, the biggest jump since 2008.
Jarring as the recent pickup may be, however, price spikes are unlikely to be permanent or long-lasting, according to some Capital Group economists.
The factors driving price jumps — post-pandemic consumer demand, government relief spending, supply-chain bottlenecks and worker shortages — are all likely to subside as the economy adjusts to a reopened world. In some cases, price spikes are already showing signs of moderating. Lumber futures, for example, have started to unwind, though they were still floating near $800 at the end of June.
To be sure, inflationary pressures have been more vexing than expected as vaccine distribution began ramping up a few months ago, and the forces behind the run-up won’t dissipate immediately. Snags in the global supply chain, for example, stem from factors such as pandemic-induced production cuts and chronically lean inventories that weren’t designed to withstand an extended disruption.
Nevertheless, many of the most pronounced price spikes are centered in industries that are rapidly rebounding from pandemic lockdowns — a dynamic that is expected to abate in coming months.
“I think what we’re seeing is stimulus-induced demand meeting COVID-restricted supply, and that’s created a lot of volatility,” says Capital Group economist Darrell Spence. “Personally, I don’t think the demand or supply situations are permanent. However, that could be wrong. This is my first pandemic, and we are still in uncharted territory economically.”
Worries about a prolonged period of rising prices have historical grounding. The late 1960s and early ’70s witnessed an influx of cash from Great Society and Vietnam War spending, whereas today’s economy is flush after stimulus checks and anti-COVID-19 funding. And the Fed’s recent emphasis on pursuing full employment echoes Richard Nixon’s assertion that “we’ll take inflation if necessary, but we can’t take unemployment.”
But a deeper look suggests that these similarities exist only in broad strokes, says Capital Group economist Jared Franz.
“The 1970s-type inflationary outburst was generated from a very different set of initial conditions,” he explains. “The economy had been running very hot in the mid-’60s, much hotter than it was during the 2010s. The open-ended stimulus and spending in that period went into this already strong economy. That’s much different from the kind of temporary fiscal programs helping today’s pandemic-impaired economy.”
Additionally, the economy in 2021 likely has more room to absorb support. Unemployment is improving, falling to 5.8% in May from the April 2020 high of 14.8%. But the real jobless rate is likely higher because the official figure doesn’t account for people who aren’t actively seeking work, Spence says. Many more people are staying home due to fears over the lingering virus, increased domestic responsibilities such as child care or elder care, and boosted federal unemployment insurance.
“There are still 7 million fewer people employed now than there were prior to the pandemic,” Spence says. “However, they are not necessarily spending like they’re unemployed, possibly because of federal government support.”
Although prices are rising overall, a close look at the CPI indicates that a relatively small subset of industries are responsible for the lion’s share of the increase. On a month-to-month basis, categories including car and truck rentals, airline fees and domestic services were among the largest growers.
“Those sound like pandemic-oriented industries,” Franz says. “You’re buying a new car because you moved to the suburbs. You’re paying to clean up a house you’ve been spending more time at or bringing in someone to help with Grandpa. I’d be more worried if I saw broader inflation or if I was seeing [traditionally slow-moving] rent in these high-inflation categories.”
And though stimulus checks probably played a role in firmer prices, it’s unlikely that they’ll drive long-term change. Families who weren’t affected by a job loss appear to have treated them as a sort of bonus check.
“If you look at spending on pleasure boats and other recreational vehicles, it grew over 40% in the middle of the pandemic,” Spence explains. “People most likely do not need to buy new boats or RVs each and every year. Once we get to the other side of the reopening, some of these categories are going to find that raising prices is much more difficult.”
The Fed was careful to signal its dovishness early in the pandemic recession, saying it planned to keep rates low — at their current near-zero levels — through the end of 2023. Given the signs of recovery this year, with both markets and GDP rising, there are now some indications that the central bank thinks rate increases in 2023 might be warranted.
Spence says: “2023 is a long way away, and the Fed has said it wants to be cautious with any tightening. I think they would like to be patient, unless the data forces their hand. For now, however, their comments suggest that they think this inflation is transitory.”