Is inflation as serious as some say?

“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.” That’s according to Sam Ewing, a former baseball player for the Chicago White Sox and the Toronto Blue Jays. When it comes to inflation, it seems everyone’s an economist now (even though economics is often referred to as “the dismal science”). Rising prices and supply chain problems are spawning thoughts of impending financial gloom and doom.

Data released last week by the U.S. Bureau of Labor Statistics indicate that prices rose 0.6 percent during the past month. There are three inflationary factors at work simultaneously as a result of the pandemic: lots of people who have put aside lots of money; pent-up demand for goods and services; and shortages in the supplies of goods and services. But are these situations temporary?

According to the U.S. Department of Commerce’s Bureau of Economic Analysis, Americans saved $1.6 trillion since the pandemic began. Concerns about health, stay-at-home orders, limits on gatherings, and store closings led to a significant shift in people’s spending patterns. Travel declined, telework increased, and consumer spending behavior changed in significant ways. The pandemic caused the steepest three-month drop in the personal consumption expenditures price index data since the Federal Reserve began collecting in 1959. More than half of Americans say they have more emergency savings than credit card debt.

Now they’re ready for a shopping spree. With the end of pandemic restrictions and a majority of people vaccinated, consumer demand for everything from airline tickets to restaurant reservations is rebounding as people spend their pent-up savings. Personal consumption expenditures have increased at a 10.7 percent annual rate.

Inflation can occur when an economy’s overall demand for goods and services exceeds the supply, enabling suppliers to raise prices. Blame the “supreme imbalance between supply and demand coming out of the pandemic,” says Ben Ayers, Senior Economist with Nationwide Economics. Supply shortages are expected to ease as factories ramp up to full capacity and workers come back on the payrolls. Unfortunately, bottlenecks in supply chains take a longer time to resolve.

Prices were up by 5 percent in May compared to May of last year, the largest increase since the Great Recession. Policymakers have predicted that prices will rise over the coming months, especially compared to a year ago when the economy was still reeling from the pandemic shutdowns. Moreover, comparing May 2020 to May 2021 is flawed due to the super-low inflation rates during the pandemic’s early days. This year-over-year comparison shows what’s called a base effect: the year-ago figure was depressed because businesses were shut down, so the current reading looks large by comparison. The months of 2020 will gradually shift out of the calculation.

In fact, it only looks like accelerating inflation. Consider the Consumer Price Index (CPI). Less than 5 percent of the CPI categories were responsible for the vast majority of the CPI’s increase; by themselves, they would have caused the CPI to rise 10.2 percent. The index for all items except food and energy rose 0.9 percent. Included in the categories that are contributing most to inflation are hotels, airfares, car rentals, and used-car prices. Used-car prices, which account for a third of the increase in inflation, are unlikely to continue to experience extreme price spikes. The other 95 percent of categories added just 1.4 percent to the annualized rate of inflation, well below the Federal Reserve’s target of 2 percent. In other words, only a few categories were responsible for the spike in inflation.

Incidentally, used-car price are up more than 7 percent after a 10 percent increase the month before; the demand for cars – used and new – is outpacing supply in part because of a global shortage of semiconductors that has affected vehicle production. And despite a surge in air travel, leading to a surge in ticket prices, prices have not increased to their pre-pandemic level. “Parts of the economy contributing the most to inflation in April and May are going through understandable short-term adjustments or merely reflating back to ‘normal’ levels,” said Chris Low, chief economist at FHN Financial. “Areas not impacted by the pandemic are moderating the CPI rise. But this report confirms demand is exceeding supply.”

Ron Temple, the head of U.S. equities at Lazard Asset Management, said, “The next few months are likely to be noisy, and investors should focus on data this fall when schools are fully reopened and several million workers can rejoin the labor force.” Similarly, Alastair George, the chief investment strategist at the investment firm Edison Group, said, “We believe the data is still very noisy and say more about the rapidity of the rebound in demand, which is welcome, rather than any signal about the long-term outlook for inflation.”

Mark Berg is a community activist in Adams County and a proud Liberal. His email address is MABerg175@Comcast.net.