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The Three Forces Driving Inflation Up and What It Will Take to Calm Them

If you’re looking for a price drop on everyday items on your shopping list, you might be waiting a while.

Data released last week by the Bureau of Labor Statistics showed inflation jumped 8.5% in March from a year ago – the biggest increase since 1981 rates.

And while consumers from all economic backgrounds are feeling the pinch, accelerating inflation tends to squeeze low-income and fixed-income securities. employees the most. Richard Curtin, director of consumer sentiment surveys at the University of Michigan, says his data shows the “pain” of inflation has hit every corner of the US economy.

“You have to eat, you have to drive to work and take the kids to school, and you have to live somewhere. These are not discretionary areas,” Curtin said, adding that consumers are looking for other places where they have room to cut spending.

“It’s painful,” he said.

According to experts, three main factors are currently fueling much of the price growth: the sharp rise in labor costs, energy prices and interest rates. Each drives up the cost of everyday consumer goods and it will take a complex set of forces to back to pre-pandemic normalcy.

Wage increase

The legion of workers quitting their jobs, especially those in low-wage sectors, has played a huge role in driving up the cost of labor, said Jayson Lusk, professor and director of agricultural economics at Purdue University.

“To get enough workers to show up now, you have to pay more, so we’re seeing wage rates go up in many food and agriculture sectors,” Lusk said.

Lusk cited current wages paid to meat processors, which BLS data shows increased 8.3% from the third quarter of 2020 and the third quarter of 2021, as an example of accelerating wage growth in the food industry.

Overall, BLS data shows U.S. employment costs have accelerated in three of the past six quarters, and to levels well above pre-pandemic trends. Economists expected a waning pandemic and an easing of Covid-era restrictions to spur more workers back into the workforce, but that’s not happening as quickly as expected, Lusk said.

“The labor market needs fixing; you need a solution to the big quit problem,” he said. “There is no normality until this happens.”

The timeline for that is anything but clear, however. Respondents to a November 2021 survey from the Federal Reserve Bank of Philadelphia said they generally expect payroll growth to remain strong in 2022.

“If these forecasts are correct, job opening and quitting rates should remain high and wage growth should remain strong for the remainder of the year,” according to Bart Hobijn of the Federal Reserve Bank of San Francisco, who wrote the bank’s economic letter this month.

The energy cost conundrum

After the workers have produced the products, the goods must be transported. So while you’re at the pump and paying high gas prices, that means the companies that carry your packages and groceries are doing the same.

The average price of a gallon of gasoline in the United States hovers around $4.10, and the price of crude oil, which can affect how much you spend at the pump, has repeatedly topped $100 the barrel in recent months. Benchmark Brent crude averaged $117 a barrel in March, up $20 from February. The U.S. Energy Information Administration said in its latest outlook that the rise was triggered by Russia’s invasion of Ukraine, which rocked markets around the world.

“Russian sanctions and other actions have contributed to the slump in oil production in Russia and created significant market uncertainty about the potential for further oil supply disruptions,” the statement said. ‘EIA, adding that this was happening against the backdrop of already low oil inventories and increased demand.

“Actual price outcomes will depend on the extent to which existing sanctions imposed on Russia, any potential future sanctions, and independent company actions affect Russian oil production or the sale of Russian oil on the world market,” said the EIA.

Refresh request

The final driver of consumer prices is simply demand. At the start of the pandemic, the US government unleashed waves of financial support measures to fortify the economy as businesses closed.

But Lusk, the Purdue economist, admitted that, as necessary as these short-term measures are, they may have led to the excess demand that the Federal Reserve is now trying to calm.

“People have money and they want to spend it,” Lusk said. “And despite higher prices, if you ask how people react to inflation, they say, ‘I don’t really change, I just pay more, no reduction. That suggests they’re not acting like it’s a recessionary environment yet.”

This is the main reason the Federal Reserve is now set to raise interest rates by 0.5% at its next meeting in the first week of May, with plans for six more rate hikes until at the end of 2022. The idea is to make borrowing more expensive. and invest money.

“Forecasters have grossly underestimated the severity and persistence of supply-side frictions, which, combined with strong demand, especially for durable goods, have produced surprisingly high inflation,” the chairman said. Federal Reserve, Jerome Powell, in a March 21 speech confirming that there was simply more demand for less of the goods available, which drove prices higher.

Powell said the Fed will use its tools “to moderate demand growth, thereby facilitating continued and sustainable increases in employment and wages.”

At least one economist thinks inflation figures for March could be the peak with a gradual decline to follow. Ian Shepherdson, chief economist at Pantheon Macroeconomics, now predicts inflation of 6% by July and 3% by next January.

“The outlook hinges on oil prices remaining near current levels and core inflation slowing due to lower vehicle prices and slowing wage gains,” he wrote in a statement. note to customers April 12.