Virginia Tech economist David Bieri says temporary increases of some prices are normal as demand is outstripping supply in specific sectors of the economy such as fuel, labor, and some consumer goods. As we come out of the pandemic, Bieri says, growing inflation entirely depends on how quickly supply can catch up.
Reports out this week indicate that U.S. inflation has grown 7.5 percent in the last year, reaching a 40-year high. Businesses continue to struggle with labor shortages and the cost of consumer goods continue to rise.
“Economists and policy makers worry about whether or not this spike in inflation will spill into other sectors and thus lead to more permanent increases in the price level,” says Bieri. “Officials at the Federal Reserve are worried enough about this prospect that they have signaled that with increases in interest rates for the first time since 2018.
“While these short-term labor shortages might affect consumers negatively with fewer options, as firms adjust and continue to compete of the pent-up spending power of post-pandemic households, this is likely to lead to both efficiency gains – better service with less, more automation – and more options as entrepreneurs explore new opportunities,” says Bieri.
“With labor force participation reaching a 50-year low due to the pandemic, workers need to be enticed back to the labor force as these new opportunities begin to establish themselves,” says Bieri. “Post-pandemic entrepreneurialism in the U.S. is thriving, but it will take some time before consumers feel the full impact of this new dynamism.”
Another driving force for rising inflation is the soaring cost of housing rentals and fuel.
“Spending on housing is the largest share of consumer expenditures which is reflected in the fact that this spending category makes up almost a third of the basket of goods and services that is used to calculate the Consumer Price Index for All Urban Consumers (CPI-U),” says Bieri. “Since increases in the CPI are the most common ways of quantifying inflation, the steep increases in house prices and rents will be reflected in the CPI and register as inflation.
“Fuel prices have also increased by nearly 54% since the start of the pandemic and are not showing any sign of abating,” says Bieri. “Although average household expenditures on fuel account for less than 5% of all expenditures, such historically large jumps in the price of fuel will continue to push headline inflation up.”
David Bieri is an associate professor in the Virginia Tech School of Public and International Affairs and an associate professor of economics. He also holds an appointment in the Global Forum on Urban and Regional Resilience. His teaching interests are at the intersection of public finance, monetary theory, and history of economic thought. He has held various senior positions at the Bank for International Settlements in Basel, Switzerland. Prior to his work in central banking, he worked as in investment banker in London and Zurich.
