The last year has been an historic time. The pandemic caused a pause in our economy and affected all of us in terms of how we conducted our lives. Lockdowns were commonplace and the American public learned a new way of existing with masks and a dearth of social gatherings. The vaccine and its rollout have given us renewed hope that things will return to normal in the not too distant future. Most pundits are forecasting an economic boom with GDP growth exceeding 6% this year. However, will we be dealing with that insidious phenomenon known as inflation? Prices have been rising, some dramatically, so as the economy has responded to so many rounds of federal stimulus that it is hard to enumerate how many. I lived through the last bout with inflation in the late 70s and early 80s and it was difficult.
Most in the administration and the Federal Reserve seem to be downplaying the specter of inflation. While we have several indicators that seem to point to higher inflation, most in charge seem to think it is temporary. I, for one, am not sure that is the case.
For many years now, we have not dealt with the specter of inflation as it has run along at less than 2%. However, that appears to be changing and what follows delineates some of the evidence:
· The consumer price index (cpi) for March was 0.6%, the highest increase since 2012. The index was driven by a 9.1% increase in gas prices and a 5.0% increase in natural gas.
· Speaking of gasoline, the average price of a gallon of regular unleaded gas in April is $2.88 per gallon. A year ago, that same gallon of gas was $1.77 according to AAA. That represents a $1.11 increase in the price of a gallon of gas, an increase of 63%.
· Certain commodity prices like lumber have been out of control. In April of 2020, 1,000 board feet of lumber cost approximately $320. Today, that same 1,000 board feet of lumber is trading at $1,400. That represents a quadrupling of lumber prices over the last year. This has a tremendously negative impact on the construction business. Additionally, when you look at other materials used in construction, like copper (+28.2% year to date), steel (+ 27.6% ytd) and pvc pipe (nearly double a year ago), they have all experienced significant increases. These price increases cumulatively have added tens of thousands of dollars to the cost of an average single-family home.
· More modest increases have hit the food industry. According to a recent article in the Wall Street Journal (WSJ), the latest March data showed that prices rose significantly. Food at home prices rose 3.3% from a year earlier, while prices for food away from home rose 3.7%. Fast food restaurant prices rose 6.5%.
· While food prices rose relatively modestly compared to some of the others cited, some agricultural commodities have experienced greater increases this year. Some of those include soybeans (+21.2% year to date), wheat (+15.3%), milk (+11.7%), sugar (+12.1%) and corn (+48.4%). These commodity prices will surely be reflected in prices to the consumer. Additionally, it looks like we already have built in increases in food prices already in the pipeline.
While not all commodity prices have increased, the preponderance of commodity prices have increased and all of the commodity price increases have yet to be reflected in prices to the consumer. Higher consumer prices are ahead.
The housing market continues to boom despite the increase in construction costs. My somewhat educated guess is that the housing market will continue to be good, given the deficit in homes built in the years following the financial crisis of 2008-2009, and as long as interest rates stay low, offsetting some of the price increases. There is pent up demand out there, particularly for starter homes. Dampening that demand will be the significant increases in prices we have seen in the last year and the runup in construction costs as mentioned for many of the principal materials used in the construction process.
Inflation is an insidious phenomenon. Food and gas prices in particular affect family budgets and will definitely affect those on the lower end of the income spectrum, consuming a larger portion of the family budget. Further stimulus will only exacerbate the situation, and it looks like that is where we are headed. Let’s hope the people in charge adopt policies which will dampen inflation before it gets out of hand.
Jeff MacLellan is retired from Landmark Bank. He spent 37 years in banking, and has been tracking local economic indicators since he came to Columbia in 1987.
Originally Appeared On: https://www.columbiatribune.com/story/business/columns/2021/05/02/inflation-creeping-back-into-economy/7400211002/