Distortions from the coronavirus pandemic have obviously caused some of the wild price swings buffeting the economy. Some price surges will fade as supply and demand rebalances. Other price hikes are more worrisome, including rent, food and energy. If that inflation lasts, it could cause sustained consumer pain and undermine the recovery. It could also jolt financial markets by forcing the Federal Reserve to abandon its stimulative monetary policy sooner than expected.
First, the inflation that’s most likely to fade. A variety of one-time factors have caused shortages of certain goods and anomalous price hikes. Looking at prices on a two-year basis, rather than just one, gives a sense of just how abnormal the supply-demand mismatch is for these products and services:
Used cars. This is the craziest anomaly in the economy right now. A shortage of semiconductors has slashed new-car production, leaving many buyers little choice but to shop used. As a result, used vehicle prices are up 45% during the last year. The two-year jump is 41%, indicating this is real inflation, not just a rebound from pandemic lows. But there’s some good news, too. Used cars are (usually) cheaper than new ones, so most buyers stepping down are actually saving money. Some buyers can put off a car purchase until prices normalize. And the chip shortage should ease in coming months, with things ultimately returning to normal.
New cars. With used vehicles as an alternative, new-car prices have been holding steady—until June, when they jumped 5.3% on a 12-month basis. That suggests there are now shortages in the entire car market, new and used combined. But this too will ease in coming months as chips come back online.
Airfares. They’re up 24.6% year-over-year, which sounds like a lot. But they’re still down 9% from two years ago, which makes this a kind of phantom inflation that shows up in the numbers but is still costing fliers less than normal.
Hotel rooms. Similar to airfares, they’re up 15% over one year but down 1% over two years. Not something to worry about. The nation doesn’t suffer an urgent shortage of hotels.
Rental cars. Prices have soared 88% during the last year, while the two-year surge is 76%. There are real shortages of vehicles because rental agencies slashed their fleets in 2020, thinking the coronavirus recession would last a lot longer than it did. More cars are coming, but rental firms face the same vehicle shortages as everybody else.
A sign is posted in front of an Avis Budget rental car office on July 28, 2020 in San Rafael, California. (Photo by Justin Sullivan/Getty Images) ·(Justin Sullivan via Getty Images)
Clothing. Prices are up 4.9% during the last year, which might sound like a bit of a budgetary strain as workers head back to offices and parents begin to dress their kids for a new school year. But clothing prices are down 2.7% from two years ago, and they’ll probably stabilize as consumer spending continues to rotate from goods to services such as travel.
Restaurant meals. Prices are up 4.2% over one year and 7.5% over two years. Is anybody complaining? The pandemic hammered the restaurant industry, with many outlets shutting down. Dining out is a luxury for many consumers, not a necessity, which will keep prices in check, even if costs are rising for some restaurants as they struggle to find workers and deal with their own spot shortages.
Inflation in these parts of the economy is most likely to ease, since one-time factors related to the pandemic are already sorting themselves out. Lumber is one striking example of how this has already happened. Prices soared earlier this year as consumers fixed up their pads and developers tried to meet blistering demand for new homes. Mills finally cranked out enough product to meet demand, and prices plunged. After nearly doubling, lumber prices are now down 25% for the year.
Other types of inflation could be more damaging. Here are three to worry about:
Rent. Rentsareup 2.3% during the last year and 5.2%% over two years. The numbers aren't huge but rents could continue rising as the pandemic recedes and emergency measures protecting renters expire. Rents also tend to be “sticky,” which means they don’t necessarily come down once they go up. And they’re obviously a much larger part of the family budget than restaurant meals or a work outfit. This may constitute a growing burden for many households.
Food consumed at home. Food prices are up a scant 1% during the last 12 months, but 6.5% over two years. Price hikes instituted during the early days of the pandemic—March, April and May of 2020—appear to be sticking.
Energy. Household energy costs are up 6.5% year-over-year, while gasoline is up 45%. Prices are still in what you might call the normal range, since they plunged last year and recovered this year. Gas prices, for instance, are still just 11% above 2019 levels. But the global recovery is prompting a burst in demand for oil, while producers are keeping supply relatively tight. Energy prices are volatile, of course, but that doesn’t make inflation less painful. The sooner the transition arrives, the better.
Editor's note: An earlier version of this story included a mistaken figure for the annual increase in rents.
