This is why a return to “normal” prices is so elusive

The consumer price index came in at 3.2% for the month of July, compared with 3% in June, the Bureau of Labor Statistics reported Thursday.

Again, food prices were among the biggest contributors to last month’s increase. Food prices at home increased 3.6% over the past 12 months, while food away from home, such as restaurants, increased 7.1% over that period.

Other large annual increases were seen in home prices, up 7.7%; While transportation services – such as airline tickets – increased by 9%.

How did everything become so expensive and will prices ever drop again?

The good news is that price increases have already drifted down from the highs we saw last summer. At one point, year-on-year inflation reached 9.1%, the highest rate of rise in prices for goods and services since the early 1980s.

Thursday morning, the Bureau of Labor Statistics will release inflation data for July. Economists expect an annual increase of about 3% — about the same as June.

But in general, the prices of some goods and services have risen steadily over the years of the pandemic. The guide was front and center, as seen in the prices of eggs, ground beef, gasoline, used cars, electricity, and rent.

And while economists say prices of some goods and services are beginning to retreat from post-pandemic highs, the US is unlikely to return to pre-pandemic price levels — what some might think of as “normal” prices — any time soon.

“It’s a very long journey from the peak inflation rates we saw just a year ago,” said Mike Pugliese, director and chief economist at Wells Fargo. “We are unlikely to see an outright deflation unless we see a very severe recession,” he added.

The deflation mentioned by Polisi—falling prices and increasing purchasing power for consumers—may sound like a good thing, but it can have a negative impact on the economy. As prices fall, people tend to put off purchases in the hope that they can get cheaper things later. But what happens in this scenario is that companies struggle with slowdown in sales and workers can lose their jobs as a result.

How did we get here?

At the beginning of the inflation rally, economists made clear what was at stake: The combined effects of the Covid-19 pandemic and the war in Ukraine had disrupted supply chains, reducing companies’ ability to deliver goods in a timely manner and with sufficient volume. Volumes – and so the prices of many things have gone up.

Later, it became clear that the impact of pandemic-related fiscal stimulus payments, pent-up spending, and low interest rates had unleashed a wave of demand for goods and services that was also putting upward pressure on prices.

Finally, the labor shortage, which was a result of the effects of Covid leading to direct, long-term illnesses for workers; exiting the workforce to care for loved ones; And full retirement, led to a rise in the cost of labor.

Actually, the current The share of the population participating in the labor force is below pre-pandemic levels — something that continued to make the cost of hiring workers more expensive.

“We still have a lot of vacancies,” said Julia Pollack, chief economist at job search firm ZipRecruiter.

All this led to unexpectedly strong economic growth – and therefore to inflation. When families can count on having steady earnings, Pollack said, “they are happy to keep spending, buying clothes, booking plane tickets, going to restaurants.”

The expectation that consumers will continue to spend gives companies the green light to continue raising prices. Or as Wells Fargo’s Polis puts it: “It’s a little circular.”

What can be done to stop the cycle?

By raising interest rates, the Federal Reserve, the US central bank, hopes to make things so expensive that businesses and consumers will give up and reduce their spending.

Federal Reserve officials and other economists have given recent indications that chances of a rate cut this year are unlikely and that, if anything, a rate hike may be necessary.

Remember that as of now, interest rates are already at their highest levels in 20 years.

“We should remain willing to raise the Fed rate at a future meeting if incoming data indicates that progress in inflation has stalled,” Fed Chair Michelle Bowman said earlier this week.

“An inflationary economy may end up requiring higher real and nominal policy rates,” Citibank economists wrote in a note to clients this week.

As a result of that initial rush of federal stimulus and ultra-low interest rates in the early months of the pandemic, the economy has become less sensitive to higher interest rates, said Jeremy Schwartz, an economist at Nomura Financial Services Group. .

Compare that to the global financial crisis, when products like adjustable rate mortgages were more prevalent and many families were less financially secure.

“Families and businesses have proven resilient,” Schwartz said.

The sure cure to all this is higher unemployment: less income means less spending means less upward pressure on prices.

Andrew Patterson, chief international economist at Vanguard financial services group, says the unemployment rate may have to rise by a full percentage point, from its current level of 3.5% to 4.5% – to get there.

“It’s not something we wish for,” Patterson said. “But we need to see the job market come down.”