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The U.S. Inflation Rate vs. The Supply Chain

Wade Fowler, Synovus Trust Company

Inflation is suddenly a hot topic in the U.S. Prices for nearly everything we buy have gone up noticeably over the past year. While expectations for additional increases are more moderate in 2022, some areas of our economy are just starting to see price increases. The monthly Consumer Price Index (CPI) report showed an increase of just over six percent (6.2%) in consumer prices compared to October 2020. While this figure is helpful to give us an idea of the average inflation for all consumer products, it also hides some big increases in individual areas of the economy that contribute to the sticker shock we sometimes experience with inflation.

The Federal Reserve Bank of Atlanta tracks the price changes of different baskets of items, which provides some insight into consumer prices beyond the monthly CPI number. The chart below shows a flexible price basket and a sticky price basket.

The flexible basket contains consumer goods subject to more frequent changes in price, such as:

  • New and used cars
  • Hotel stays
  • Groceries

The sticky basket contains items that adjust in price less frequently and are typically more service-oriented. These include:

  • Rent for a primary residence
  • Medical care services
  • Meals eaten outside the home

As you can see in the chart, the flexible goods basket increased substantially over the past year, while the sticky basket has only very recently started to move higher.

Causes of inflation can make for long discussions but, at its most basic, the prices we pay for goods are defined by the intersection of supply and demand. Over the past year and a half, various parts of the global economy have stopped and restarted. Consequently, disruptions to the global supply chain created shortages of all types of goods across the country. It should be no surprise that the largest price increases are in goods most impacted by supply chain problems.

Our view is that as current supply chain bottlenecks resolve themselves, the extreme level of inflation in the flexible basket will drop substantially. We believe there is more room for the sticky basket items to increase. There are two primary reasons this will happen.

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As current supply chain bottlenecks resolve themselves, the extreme level of inflation in the flexible basket will drop substantially.

First, home prices have risen substantially over the past year, which will likely lead to higher rents over time. Second, the labor market is currently very tight, driving wage increases for workers. As these wage increases impact pricing for service industries, we expect to see price increases in that part of that sector as well.

These views are based largely on the assumption that consumer demand will remain relatively stable over the next year, and that pandemic-related disruptions will subside. If demand suddenly increases, or there is an unexpected disruption to the supply of goods again, a more prolonged period of inflation would likely result.

Important disclosure information

The views, opinions and positions expressed are those of the referenced authors at the time of publication and are based upon information available at that time. There can be no assurance that any of the beliefs and views expressed herein will prove to be accurate, and actual outcomes or events may vary significantly from those presented. The authors’ views are subject to change and do not reflect the views, opinions or positions of Synovus Financial Corp, who makes no representations as to accuracy, completeness, timeliness, suitability or validity of information presented and will not be liable for any errors, omissions, or delays in this information or any losses, injuries or damages arising from its display or use. The information provided in this material is intended to highlight present economic and market conditions in general. It does not constitute any recommendation and is not meant for use as personalized or individual investment advice. We encourage you to speak with your financial professional concerning your specific investment goals and risk tolerance before making investment decisions.

Trust services are provided by Synovus Trust Company, N.A. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. STC is a subsidiary of Synovus Bank.