The U.S. economy is awakening from a coma.
That was the analogy used by more than one economist who spoke with the PBS NewsHour about the uptick in consumer prices that Americans have experienced over the past few months — one year after the coronavirus pandemic brought the economy to a grinding halt.
The prices of goods and services in the U.S. rose by 5 percent in May from the previous year, marking the highest inflation rate recorded since 2008. The latest Bureau of Labor Statistics report released on June 10 immediately sent some investors and lawmakers into a tailspin over concerns that high inflation figures could negatively affect the stock market, or lead to a price spiral not unlike what happened in the 1970s, when double-digit inflation led to long lines at gas stations and boycotts over the high cost of food.
Recent polling by the PBS NewsHour, NPR, and Marist suggest all of the talk surrounding inflation had an impact on how everyday Americans were feeling about it, too. In a recent survey, 26 percent of respondents said inflation was their number one concern regarding the U.S. economy – more than any other area, including wages and unemployment.
But economists who spoke with the PBS NewsHour cautioned that the crisis spurred by the pandemic was unique, and the inflation rates recorded in April and May were intimately tied to the events of the last year, which saw unprecedented slowdowns in consumer spending, global supply chain issues that are still persisting, and deep job losses that have yet to rebound. They also said they expected inflation to cool as most of these issues sort themselves out, provided the U.S. does not experience another virus surge.
“In modern history, we haven’t been in this situation where parts of the economy were essentially put into a coma for a while and now they’re waking up,” said Gabriel Ehrlich, an economist and forecaster at the University of Michigan.
Here’s a look at some of the factors driving prices up in the U.S. right now, and what they can — and can’t — tell us about the current state of the American economy.
Historic fall, historic rise
In the first months after COVID-19 began spreading throughout the U.S. the country experienced deflation, with the Consumer Price Index – a measure commonly used to measure changes in price level for U.S. goods – dropping by 0.4 percent in March 2020 and then by 0.8 percent in April, a monthly decline not seen since the Great Recession in 2008.
But the pandemic turned a swift corner in the U.S. this spring. The initial COVID-19 vaccine rollout was fairly successful, with more than 3 million Americans a day on average being vaccinated by mid-April 2021. This growing vaccination rate, coupled with falling cases, spurred many businesses that had shuttered, or scaled back during the height of the pandemic, to reopen and prompted people who had been largely homebound for the past year to go out and begin spending money again. And as more consumers started purchasing goods and services that had gone largely untouched this time last year, the cost of items such as airline tickets, rental cars, and hotels rose significantly.
Amid this sudden uptick in consumer demand and lingering supply chain issues tied to the pandemic, consumer prices rose 5 percent from the previous year in May.
Robert Rich, director of the Center for Inflation Research at the Federal Reserve Bank of Cleveland, said some of these price hikes were not unexpected, given the historically low price drops that occurred across many sectors of the economy this time last year. “When the pandemic hit, we saw prices for some goods and services go down significantly,” he said. “The minute they move out of that 12-month window, you’re going to start to see this surge in inflation.”
And while the recent inflation has been cause for worry among some in Washington, economist Claudia Sahm, a former section chief at the Federal Reserve, said it came as no surprise to economists after the historic deflation that occurred last year. Drawing on the coma analogy, Sahm said we can’t predict whether the economy will suddenly “snap out of it” or awaken more slowly — but she believes inflation is likely to slow down in the coming months.
Rising consumer prices point to some positive signs that the economy is recovering. In addition to airline fares and hotels, the cost of apparel rose by more than 5.6 percent over the past year, driven in part by raw material shortages but also pent-up demand for clothes from shoppers coming out of quarantine. The cost of food away from home also rose as more Americans spent more money on restaurants thanks not only to a third round of stimulus payments but also the lifting of dining restrictions and a recovering labor market.
The Federal Reserve responded to inflation the week of June 14 by pushing up its timeline on when it will next raise interest rates to 2023. (The Fed typically raises interest rates during periods of inflation to slow growth and keep the economy from overheating.) Fed Chair Jerome Powell told Congress on June 22 that these current price increases tied to the pandemic were larger and more persistent than expected, but that he did expect inflation to “wane over time.”
But regardless of whether Americans start to see lower prices on items like gas and rental cars in the coming months, some 9.5 million still remain unemployed — an indicator that the U.S. economy is far from a full recovery, especially as the country is still in the throes of the pandemic.
“Inflation can have far-reaching and potentially damaging impacts, and a persistent or dramatic rise in inflation would be of concern,” said Mark Hamrick, a senior economic analyst with Bankrate, adding that he did expect the Federal Reserve to take action if this happened. But he said that it was still too early to tell whether supply and labor shortages would lead to long-term inflation, noting that like so many questions surrounding the U.S. economy over the past 16 months, “this is just an issue that’s going to have to play itself out.”
Some price hikes driven by supply chain issues
One of the most eye-popping trends driving up inflation in May was a shortage of used cars and trucks, which caused prices of these products to rise nearly 30 percent over the past year.
“We’re seeing a lot of inflation in the vehicle sector,” said Laura Rosner-Warburton, a founding partner and senior economist with Macropolicy Perspectives. She identified a few factors that put extra pressure on the used car market: High demand for new cars due to public transportation fears during the pandemic, coupled with a shortage of the microchips needed to manufacture them that began last year, drove more people to the used car market. Additionally, faced with an initial drop in business at the beginning of the pandemic, many rental car companies sold their fleets, only to see demand spike the following spring. Those same rental companies are now bidding on used cars, too.
“There’s just excess demand right now, and very limited supply, and it’s really driven up used car prices to an unprecedented degree. That’s what’s behind a lot of that momentum in the Consumer Price Index,” said Rosner-Warburton.
Gabriel Ehrlich said that supply-chain bottlenecks similar to the microchip shortage affecting the vehicle sector are also touching other parts of the economy. The price of lumber, for example, was up nearly 90 percent in April from the previous year, which in turn drove up prices for home furnishings as well as new homes. The rising cost of raw metals also contributed to an increase in prices for home appliances, such as microwaves, in May.
But economists generally expect these supply-chain issues to sort themselves out in the coming months.
Claudia Sahm cautioned against reading too much into the crazy price hikes in a sector like used cars. “Telling me that used car prices rose more than ever before really doesn’t tell me anything,” she said, noting that while supply chain issues are likely to work themselves out in the end, a resurgence of the coronavirus, which public health experts are warning may happen, could put the U.S. back where it started last spring: “COVID has been in charge of this economic crisis from the start, and it will be in charge of it until the end.”
Other price surges tied to reopening
Among the industries hardest hit by the pandemic was travel, and the reopening of the economy prompted a major rebound in demand for items like airline tickets and hotels — both of which were largely on hold during the height of the pandemic.
After plummeting 28.8 percent from the previous year in May 2020, airline fares rose this spring, with year-over-year prices jumping by 9.6 percent in April 2021 and by 24.1 percent the next month.
Sahm said this is a reflection of necessary price hikes by the airline industry, which could not have functioned more than a year or two at the levels they were in 2020.
“Yes, they’re overshooting and they will come down,” she said.
The price of hotels and motels also went up by 10 percent in May compared to the previous year, another trend that is also almost certainly tied to the reopening. “People have been cooped up in their homes. They missed holidays. They hadn’t seen family, no vacations,” said Sahm of some of the spending driving inflation in last month’s Consumer Price Index report. “So it’s not surprising.”
Rosner-Warburton also noted that the cost of eating out at restaurants rose over the past year, in part because of worker shortages in the food service industry. “The reality is that those public-facing jobs are riskier than they were before,” she said. “And so those employees and workers, they are demanding raises.” Rosner-Warburton added, though, that she expected this trend to be a one-time shift, rather than “an ongoing sequence of wage increases.”
Inflation likely to fall, but jobs recovery could take longer
It’s normal for Americans to worry about inflation — after all, it can have a direct impact on their budgets and pocketbooks.
But Sahm urged caution against so-called “inflation hawks” who have suggested the current trends could lead to a “wage-price spiral” akin to what happened in the late 1970s, when both rising wages and prices caused inflation to rise above 10 percent.
Powell was pressed on this question by House Republicans on June 22 but said it was “very, very unlikely” the country would get anywhere near this point.
Robert Rich of the Federal Reserve in Cleveland echoed Powell’s point, noting that there’s still a lot of slack in the labor market — meaning that a high number of Americans remain unemployed compared to the number of jobs available — and unions are nowhere near as numerous or as powerful in driving wage negotiations as they were 50 years ago.
For now, Sahm said she sees promising signs that inflation is cooling. While it reached a historic high in May, consumer prices grew at a slower rate compared to the previous month’s change. And she said recently prices on some of the items and commodities that had been driving up inflation, like lumber, microchips, and used cars, have been decreasing.
But bigger questions about the overall health of the U.S. economy remain. As lawmakers questioned Powell on inflation toward the end of June, they also debated whether extended unemployment benefits are keeping Americans from going back to work, and discussed what duty the U.S. has to donate COVID-19 vaccines to other countries in order to help the rest of the global economy get back on track. While the U.S. has experienced a swift economic recovery from the coronavirus thus far, growth is much more uneven in other parts of the world where vaccination rates remain low and transmission of the Delta coronavirus variant continues to push economies back into lockdown. Some economists have warned of large and persisting trade deficits if the U.S. economy recovers much more quickly than other countries.
Both Ehrlich and Sahm said they’ve been paying closer attention to jobs reports for a true measure of where Americans are feeling an economic pinch. The most recent employment report showed promising signs of recovery, with the U.S. adding 850,000 workers in June, but that’s still below the one million monthly job gains that Fed Chair Powell said he wanted to see consistently. Unemployment rose to 5.9 percent in June, and there are still 6.8 million fewer jobs compared to February 2020. Industries with low-wage workers, such as leisure and hospitality, have been slower to recover despite showing gains in the most recent jobs report.
“The reality is we’re in a really big jobs hole, and it is lower-income workers who are least likely to be re-employed,” Ehrlich said.
“For many people way up into the middle class, if they miss a paycheck, or three months of paychecks, they are in serious financial difficulty. So when unemployment goes up, this is bad,” Sahm added. “We should not say mission accomplished until the unemployment rate is back down.”