Opinion: Inflation is not over yet. Here’s when we should finally see lower prices

Total Consumer price index (CPI) rose 5.3% year-on-year in August after reaching 5.4% year-on-year two months earlier. The core index, which excludes the volatile components of food and energy, rose 4% year-on-year in August after peaking at 4.5% in June. Importantly, the month-to-month rates of increase for each of these indicators (0.3% for the total index; 0.1% for the core measure) were significantly slower than during the last few months.

These figures give hope that the worst inflationary pressures may be behind us. But this is probably a false aspiration. Yes, the intensity of the price hikes has slowed down over the summer, but the Delta variant and its disruption risks another US consumer price spike in the fall. Even if they don’t happen, consumers are unlikely to see their prices drop this year due to computer chip shortages, rising wage pressures as businesses reopen, and returning rent increases.

The Delta variant may cause monthly price increases, and therefore year-over-year readings, to worsen temporarily before improving. The Delta variant has renewed major supply chain disruptions as factories in Asia that supply the United States with consumer goods close. Additionally, as spending on in-person services amid the Delta surge – such as going to bars and restaurants – remains stable, strong demand for durable goods, like clothing and furniture, will persist. As businesses struggle to stock their shelves, customer prices will continue to rise. It’s a particularly bad time with the winter holiday shopping season just around the corner.

Flea shortage

The global semiconductor shortage cannot be resolved overnight, which suggests higher prices for new cars and high-tech gadgets that use computer chips. A deficit of used cars to satisfy buyers unable to purchase a new vehicle will simultaneously push these prices up.

Labor costs

The Delta variant may temporarily slow down the activity of in-person services. But once past the shock of the virus’s latest resurgence, prices in places like theme parks, sporting events and bars could continue to rise as these businesses reopen amid a significant shortage of national workforce. With some potential workers fearing infections, closed schools keeping many mothers at home, older workers retiring, and still generous unemployment benefits in some states keeping others on the sidelines, labor costs work should continue to climb. Indeed, companies are already passing part of their higher labor costs on to their customers.


Meanwhile, the prices of actual rents and homeowners’ equivalent rent – the money a landlord could receive if they rent out their home, which typically tracks rises and falls in actual rents – are likely to take off. During the pandemic, strong demand for owned home purchases drove rents down. However, as more people are excluded from the hot housing market, and young people who fled to their parents’ homes outside of city centers during the pandemic return to urban life, demand for rental housing is expected to rebound. They will likely increase in line with demand and push consumer prices higher over the next nine to twelve months.
The prolonged voracious consumer demand for the very short-term goods of the Delta variant, along with continued pressure on wages, increases in reopening costs for services like airlines and hotels, and standardization of rents, all suggest pinched portfolios for many months to come. Indeed, the CPI could be in a range of 4% to 5% year-on-year until 2022, more than double its 20-year average of 2%. In addition, the headline and core inflation rates for personal consumption expenditure, which the Federal Reserve monitors closely as they measure the prices of goods and services purchased by consumers, may not come back close to the target of 2. % of the central bank before the second half of 2022.

While an additional nine or ten months of high prices might not be forever in economic terms, it may seem like it to consumers. So, if households’ longer-term (three to five year) inflation expectations continue to rise, the Fed may have to signal higher interest rates sooner than expected. Typically, if consumers expect prices to continue to rise sharply in the long run, the Fed will raise interest rates to prevent runaway inflation from occurring.

So while the August CPI report was better than expected, prices were still very high during the month. And it is very likely that inflationary pressure will probably be with us for some time to come.

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