PCE, Inflation and OPEC Plus Meeting: Live Business News

Economists expected Americans to shift from buying goods, like furniture and appliances, to spending on vacations, dining out and other se...


Economists expected Americans to shift from buying goods, like furniture and appliances, to spending on vacations, dining out and other services as the pandemic wanes, betting the transition reduce pressure on supply chains and help moderate inflation.

Rapid wage growth could make this story more complicated. Demand for services is rising as many employers struggle to find workers, which could force them to keep raising wages. Although positive for workers, this could keep headline inflation high as companies try to cover their labor costs, accelerating price increases for services even as they begin to moderate for goods.

Heavy spending on goods during the pandemic has been a driver of the recent surge in inflation. Consumers started to cling physical products a few months after the pandemic shutdowns began and continued to buy. Spending on services has also recovered, but much more slowly. This shift in what people buy has upended supply chains, which weren’t designed to produce, ship and deliver as many cars, treadmills and washing machines.

Policymakers spent months betting that as the virus waned and consumers returned to more normal shopping habits, prices for goods would slow their ascent or even fall. This would lower inflation, which has reached its fastest pace in 40 years.

But this transition – assuming it happens – could do less to calm inflation than many had hoped. Much of what the government defines as “services” inflation comes from rental housing costs, which often go up as wages grow as households can afford more and increase the cost of a limited supply of housing units. And when it comes to discretionary services, like salons and gyms, labor is a major production cost. An increase in wages probably means higher prices.

Jason Furman, a Harvard economist who served as a top adviser to President Barack Obama, said the shortage of workers in many service industries means that if demand for services increases, prices will also rise. This means that a shift in spending towards services will not necessarily lead to a general slowdown in the pace of price increases.

“A very large number of services are incredibly limited,” he said. “As we go back to services, we’ll have more services inflation and less goods inflation, and I don’t think it’s at all obvious that the result of that will be less inflation.”

Inflation is rising at the fastest pace since 1982, data released on Thursday confirmed. Prices have gone up from 6.4% in the year to February, more than three times the Federal Reserve’s target of 2% annual increases on average.

Rapid price changes have spread beyond goods and services in recent months. While America has grown accustomed to thinking about product shortages — sofas are out of stock, shoes are out of stock — labor shortages could mean services will end up being oversubscribed too. , allowing providers to charge more.

MaidPro, an in-home cleaning company, has seen an increase in demand from professionals spending more time at home. But it’s struggling to find workers to keep up, said Tom Manchester, the company’s chairman.

“Our current demand exceeds our supply of being able to meet that demand,” he said. “Demand continues to be strong – like strong double digits. And if we could find qualified pros to meet the demand, we would be even further ahead than today.

Credit…Gabby Jones for The New York Times

Mr Manchester said hourly wages had risen by $1 to $3, raising costs at a time when cleaning products became more expensive and higher petrol prices made reimbursements of more expensive trips. MaidPro franchisees were able to pass these costs on to their customers, both via fuel surcharges and outright price increases that more or less kept pace with inflation.

So far, they have lost few customers, partly because few competitors have the ability to acquire new customers.

“If someone has someone they really love coming to clean their house, they don’t want to lose them,” he said. “They don’t want to risk saying, ‘I want to walk away from MaidPro and try to find someone else’, because in nine out of 10 cases that person is not available.”

Some economists argue that if goods inflation slows, it could still help moderate overall price gains, even if wages rise. The prices of products that last a long time have increased 11.4% of the year to February – posting the first slight moderation in months, of 11.6% in January. Price for shorter life products such as cosmetics and apparel continued to accelerate on an annual basis, climbing 8.6%. Both are still much stronger than service inflation.

“We have a sharp decline in property prices in mind,” said Roberto Perli, head of global policy research at investment bank Piper Sandler. “It would take a lot of service price increases to offset that.”

Outright declines in the prices of goods are not guaranteed. Take the cars: Rapidly rising prices for new and used cars were a major driver of inflation last year, and many economists expect these prices to fall in 2022. But Jonathan Smoke, Cox Automotive’s chief economist, said continuing shortages mean lower prices for new cars. are expected to continue to rise, and new car supply issues may spread and mitigate the expected decline in used car costs.

And services inflation is also accelerating. This ran at 4.6 percent for the year through February, the fastest pace since 1991. If sustained, that is enough to keep inflation above the Federal Reserve’s 2% target, even if bond prices products stop accelerating.

While goods have made up a larger share of household budgets in recent months than before the pandemic, Americans still spend nearly twice as much on services as on goods overall.

“You don’t need a lot of additional service inflation to make up for your lost property inflation,” Furman said.

Restaurants, hotels and other optional services aren’t the only places where persistent demand could come up against limited supply, Furman argued. Many non-emergency health care services have seen a drop in demand during the pandemic and are now seeing a rebound amid shortages of nurses and other skilled workers.

Rent – ​​which is the biggest monthly expense for many families and plays a big role in determining headline inflation – has also risen at a rapid pace. In cities like Tampa, Florida, Spokane, Wash.and Knoxville, Tenn., listed rents rose 30% or more in the fall from a year earlier, according to data from Apartment List.

Igor Popov, chief economist at Apartment List, said the breakneck pace of new rent increases is unlikely to be repeated this year. But many rents will reset to higher market rates this spring and summer, he said, adding that they would likely continue to rise as long as wages do the same.

“Rents are partly a function of what people are able and willing to pay,” Mr Popov said.

The Fed’s recent decision to raise interest rates — and its planned increases throughout the year — could cooling the housing market, which could potentially affect rents. But in the short term, higher interest rates could make buying a home expensive and out of reach for more people. This could temporarily increase rental demand.

Much depends on what will happen next with wages, and everyone can guess.

Laura Rosner-Warburton, an economist at MacroPolicy Perspectives, said wages could undergo a kind of “level reset”, where companies paid in light of a newly tight labor market – in some cases, to be at equality with wages. at Amazon or other big companies – but may not continue to increase salaries as much month after month.

That may have happened in accommodation and restaurants, she said, noting that both have seen increased wage pressures that have since eased.

Credit…Gabby Jones for The New York Times

Nick Bunker, director of economic research for North America at the Indeed Hiring Lab, said conditions remained tight – there are 1.8 jobs for every active job seeker today – but the data suggests that labor shortages are no longer actively worsening, which could at least prevent wage growth from accelerating further.

“The labor market is stronger, tighter, hotter than it was before the pandemic, but there are signs that it’s starting to stabilize,” he said.

It’s also possible that higher wages will draw workers into the labor market, helping to offset labor shortages and allowing conditions to settle on a more sustainable path.

But the economy has repeatedly surprised economists and businesses over the past year, usually in ways that have fueled wages and inflation.

Mr Manchester said many household services executives expected the labor shortage to ease when the federal government’s enhanced unemployment benefits end in September. But although there was some increase in the number of volunteer workers, there was no flash flooding.

“Everyone is competing for hourly employees,” he said. “We compete with Dunkin’ Donuts, Home Depots, Bed Bath & Beyonds – anyone who relies on hourly workers.”

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