AS AMERICA’S ECONOMY bounces back from the pandemic, aided by trillions of dollars of fiscal stimulus, the main question on investors’ mind is if and when inflation will take off. The Federal Reserve has vowed to tolerate a period of above-target price increases so that the economy can get back on its feet, and says it is not even thinking about thinking about raising interest rates. Yet with a raft of asset prices underpinned by rock-bottom rates, investors have been jumpy, fretting that high inflation could force the central bank’s hand.
Then on May 12th came a big inflation surprise. America’s consumer-price index rose by 4.2% year-on-year in April, a rate not seen since 2008, and considerably higher than the 3.6% that had been expected by forecasters (see chart). By far the biggest factor behind the acceleration relates to the past, rather than the price pressures of today, as last year’s oil-price falls dropped out of the annual comparison used to calculate the figures. Yet even the monthly rate, when stripped of more volatile food and energy prices, was the strongest since the 1980s. Data for one month alone cannot answer the question of whether runaway inflation is around the corner. But the release tells you something about the realities of re-opening.
Consumer demand in the world’s largest economy is making an especially strong recovery. Stimulus cheques worth up to $1,400 were doled out to many Americans in the spring. Now a successful vaccination campaign is allowing them to get out and spend and restrictions to loosen. According to a tracker compiled by JPMorgan Chase, a bank, credit-card spending rose from a tenth below its pre-pandemic trend in the six months to March to only just below it by May.
The speed and nature of the post-lockdown bounceback seems to have caught many firms off guard. Not since the mid-1970s have companies been so likely to report delays in supplier deliveries, suggests research published in March by Goldman Sachs, a bank. American retailers’ inventories, relative to revenues, have plunged to all-time lows, suggesting that shops are running out of things to sell. Many firms, especially smaller ones, have ordered insufficient supplies and are now frantically catching up. (By contrast, the inventories of large listed firms have not declined, either because they were better able to forecast the coming spending binge, or because their supply chains are more diversified.)
Yet surges in demand cannot immediately be fulfilled. Take imported supplies, for instance. Even at the best of times extra demand for international deliveries takes a while to sate; a ship can take a few weeks to sail from China to America. The added complication in 2021 is that firms must also contend with shortages of containers in some ports. Some were stranded during the first wave of lockdowns.
Moreover, workers cannot be hired overnight. Firms are struggling to recruit enough staff to fill open positions—perhaps a big reason why the jobs report for April, published on May 7th, showed that America had added just 266,000 jobs, well below the 1m or so that many economists had expected. The number of unfilled positions is running at an all-time high.
Take the surge in demand and strained supply together, and you get to higher prices. Consider used cars and trucks as a template. Their prices rose by a staggering 10% in April, compared with the previous month, contributing to the headline-inflation surprise. With people nervous of flying and public transport, more may want to get behind the wheel instead to see relatives in other parts of the country or to get to work. Yet the shortage of chips has also constrained the supply of new vehicles.
Once assured of sustained demand, other companies may also begin to pass on higher costs to customers. The cost of shipping items from China to America is now three times as expensive as it was before the pandemic, and input prices have picked up since the spring.
What, if anything, can these pressures tell you about inflation to come? In order for it to stay high, such price rises will need to keep repeating, pushing up wages in turn. Yet they could reasonably be a one-off, as suppliers adjust to shifting consumer tastes. Even as economies locked down in early 2020, for instance, firms quickly found new ways of sourcing material and bottlenecks cleared. The current spike would then prove transitory. That could, perhaps, explain why markets seemed to take the inflation surprise in their stride. Yet as the recovery proceeds, other surprises will come. The combination of a generous Treasury, a tolerant Fed and a pandemic puts America in uncharted territory. The one thing that is certain is that more scares cannot be ruled out.■