Since Americans returned from WWII, inflation hasn’t run through the economy like it is now


Construction of residential single-family homes by KB Home is shown under construction in the community of Valley Center, California, United States, June 3, 2021.

Mike Blake | Reuters

Since Americans returned from World War II, inflation has not penetrated the US economy as it is now, and it may continue to do so for months to come.

This is because the pandemic has hit the economy like a blacksmith’s hammer, shattering the normal way of doing business and living the lives of consumers. Disruptions for many businesses have been difficult to repair, and getting back to normal has been difficult due to supply chain disruptions and labor shortages.

“You’ve had a very rapid and abrupt change in the economy,” said Michael Gapen, chief US economist at Barclays. “And it takes time to re-equip. He’s a super tanker. It takes time to turn around.”

Businesses and consumers across the country are feeling the impact of rising prices and commodity shortages, and many businesses are adjusting the way they operate.

Frank Barbera, president of Barbera Homes in the Albany, NY area, said this period of price hikes is unique in his family-owned 30-year history.

“The costs have definitely gone up faster than the price. Our average home has gone up over $ 60,000 and those are just hard costs passed on. The average of two by four for example over the last year of July 2020 at about the same time in 2021, went from $ 4.30 to $ 11.36, “he said. The two-by-four is now about 50% lower, but lumber is always volatile.

Barbera said other building materials have increased as well, including a 20% increase in insulation this year.

Home builder Chris Carr said his construction company has changed the way it purchases certain materials for the homes he builds in New Jersey seaside towns like Avalon and Stone Harbor.

“We have acquired more storage space so that we can store all the things we buy. We buy trucks full of roofing materials, “plumbing supplies and other materials,” said Carr, owner of McLaughlin Construction.

“We used to be just-in-time buyers, so for some aspect of a home we just can’t do that anymore.”

Price pressures

Pent-up demand, changing lifestyles and a mass of stimulus money have created a surge in demand for all kinds of goods. But that demand has encountered a supply network that has also been damaged by the pandemic and is struggling to return to a more normal level of activity. Labor shortages and logistical problems worsen the situation.

Gapen said consumption of basic goods is now around 17% to 20% above pre-pandemic levels and demand for basic services has yet to recover. Basic goods exclude food and energy.

“It is as if any economy, in any situation, would be in trouble if its citizens asked it to produce 20% more goods in a year,” he said. Post-pandemic consumers have changed their lifestyles. Many fled to the suburbs and beyond, moved into homes, and set up home offices. They also needed cars.

“This is the biggest historical anomaly in the relationship between the prices of basic goods and services that we have seen since the end of World War II,” Gapen said. “I think the World War II experience is the closest parallel to what we are seeing.”

The soldiers returned home in the late 1940s, and the demand for everything from housing to clothing skyrocketed. “You had to jumpstart the economy and re-employ all these people. What happened was you had a surge in inflation for two or three years,” Gapen said. “In the late 1940s, you flirt with deflation.”

The debate among economists is to what extent the inflation of this pandemic era will persist and to what extent it will be temporary. In October, the consumer price index was up 6.2% year-on-year, the highest in 31 years. Core CPI excluding food and energy rose 4.6%.

The prices of goods in all areas have increased. The price of gasoline in October rose about 50% from last year. Used cars are up 26% and new cars almost 10% year over year.

The index for meats, poultry, fish and eggs jumped 11.9% as beef prices rose 20% from a year ago in October.

“It’s a story of relative demand. Three [core] asset classes are responsible for most of this inflation – automobiles, used cars and household furniture. Bigger durable items, ”he said.

For decades, the prices of basic goods have fallen relative to services. “It’s really unusual to see this surge in commodity prices and this trend, because things like technological innovations and globalization have meant that you could pay more for that computer, but the computer that you have today. hui is much more powerful than the one you were 20 years ago, ”said Gapen.

Clothing and home appliances are two areas where globalization has driven prices down. According to Moody’s Analytics, compared to the overall consumer price index, the price of household appliances has fallen 46% since 2000, which means that the prices of household appliances are higher but they are lower. 46% lower than consumer prices. Clothing prices are also higher, but they are 43% lower than consumer prices during this period.

One area where prices have increased very rapidly is in hospital services, where prices have been 92% higher than overall consumer prices since 2000.

Gapen notes that normally, consumers tend to stop purchasing durable goods during more traditional downturns, resulting in lower commodity prices. But as the economy recovers from its downturn, household demand for durable goods tends to increase, pushing up prices.

But the pandemic was unusual and instead pushed up the prices of goods relative to services, raising concerns about how long prices will rise.

Mark Zandi, chief economist at Moody’s Analytics, expects prices to drop in some categories next year.

Meanwhile, inflation could feed on itself as consumers and businesses purchase hard-to-obtain items, pushing prices even higher. But that cycle is likely to end once producers catch up, stocks build and overproduction could push prices down.

He therefore expects inflation to eventually drop to around 2.5% for the core CPI, excluding food and energy.

“It may take until early 2023, but I think we’ll settle into a core CPI of 2.5%. I actually think it’s possible the prices may be lower again. will happen, ”he said.

But there is still a risk that they will not do so.

“If these price spikes affect inflation expectations and fit into the dynamics of wage prices, then we have a problem,” Zandi said. “I don’t think we are there. I think these are supply shocks in garden varieties that lead to sharp price increases but sow the seeds of future declines.”

“At this point the prices come back down to earth, and that’s the dynamic that I think we’re going to see,” he said.

Pay the rent

Shelter costs are an area where many renters would expect a big increase, but they only rose 3.5% year over year in October in the CPI. The category includes rents and equivalent rents from owners and accounts for about one-third of the CPI.

Rents are an area where economists expect to see continued price increases, even as other categories decline. According to Apartment List, rents between the start of the year and October rose 16% nationwide, and CPI data should start to catch up.

“This is affected by the pandemic, but whether or not there is a pandemic, rental prices have reportedly accelerated due to a shortage of affordable housing,” Zandi said. “The pandemic made it worse because you have all these millennials who either went back to live with their parents or doubled down when the pandemic hit. They all start with themselves, form households and rent.”

Zandi said rent adds half a percentage point to his 2.5% CPI forecast, and this is the factor that could keep inflation above the Fed’s 2% target. .

Builders, like Barbera, still experience a high demand for single-family homes, even with much higher prices. In order to meet demand, Barbera carefully manages what it builds.

“We have limited our lot releases, so in some neighborhoods we have stopped selling temporarily or we have limited the number of lots that we put on the market at the same time so that we can better control not only the costs but the labor. -work, making sure we can produce what we’re selling, “he said.” We were lucky. We have a very stable business base, but everyone is working 24/7 just to keep up. “

He hopes prices will start to stabilize.

“Other than lumber, I can’t predict that the prices of the products we currently use will drop and I don’t see a drop in the workforce. not yet stabilized, ”Barbera said.

But for small businesses, the challenge is to operate efficiently.

“With the price increases that we’ve seen, we’ve had a lot of homeowners saying ‘damn smoke, it’s expensive!’ Then it’s our job to make them understand what the trigger points were that made it it’s expensive, “Carr said.” Aside from lumber, the price of all the other materials we see is going up. Every week we get notices of price increases. It’s a very volatile market.

Carr points out that the volatility, except with lumber, has been one-sided. “I don’t get 2-3% price notices from these vendors. I get 10-15% increases several times a year,” he said. Carr said that depending on the house, the cost is 25 to 50% higher in the past two years. “The value of land has increased. The whole has increased. “

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