Two stories about inflation
Demand-side inflation is what we've seen; supply-side is where we could be going
Note: Very positive national jobs report for February, which raises expectations for the state- and metro-level reports rolling in over the next 1-2 weeks. Not only was employment up 678,000 in February, but the January numbers, which were even more surprising to most economists when were they released last month, were actually revised upward to 481,000. The national unemployment rate ticked down to 3.8%.
I was recently quoted in two pieces of journalism recently. Both were about inflation, but the underlying stories are different.
The first piece, at CBS’ MarketWatch (a national site), was about the connection between wages and inflation. Basically, people are hearing a lot about the “Great Resignation” and worker shortages driving up wages (did you know that Target will start to offer $24/hour in some labor markets?). They’re also hearing a lot about inflation - such as 7.5% year-over-year nationally and 8.6% locally. They want to put the two together because higher labor costs should lead to higher prices as firms pass on those costs to consumers.
In the MarketWatch article, I noted that if this were the case, we should see inflation specifically in service-oriented markets like education or restaurants. But we don’t see that. Most inflation is happening in durable goods like furniture, cars and trucks, etc., which are not directly linked to higher labor costs. Overall, this story is of demand side inflation. Other inflation - like the recent increases in gas prices and rents - are a product of our recovery out of the pandemic, as demand for these things comes back to normal.
The second piece, at KTLA (video only), was specifically about motor fuel prices. Overall, this is a story of supply-side inflation. Gas and diesel prices are approaching $5/gallon locally as Russia’s war with Ukraine unfolds. While gas and diesel move together, the highlight on diesel is to show how gasoline prices might affect transport costs and, therefore, goods prices. While we are not there yet, a worsening supply crisis can certainly bring us back to early-80s style inflation.
The reason I’ve been hesitant to make that historical connection to the early-80s is because we will fail to see across-the-board levels of inflation which see saw back then. Until we see 7+% inflation in all major expenditure categories - from food and beverages, to apparel, education, and housing - and a worsening oil supply (instead of just rising oil prices) I won’t be fully convinced of broad-based inflationary pressures.
I appreciate your insights and analysis Daniel. Just curious your thoughts on how skyrocketing fuel prices might impact demand for electric and hybrid vehicles. I know I have a hybrid electric, so I rarely pay attention to gas prices since I only fill my gas tank a couple times a year!