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