Economic Forecasts

Inflation Will Cool… Later

Kiplinger’s latest forecast on inflation

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Inflation will cool eventually, but likely not until late this year. At the end of the year, prices should be 5.5% higher than a year earlier, the highest rate of inflation since 1990. A reopening economy and shortages are combining to push prices up in many areas. Prices for women’s clothing, airfare, hotel rates and car rentals are all up strongly as people get out and about after largely staying home last year. Shortages have affected prices: The scarcity of semiconductors has caused a shortage of new vehicles, which in turn has pushed up the prices of used vehicles. A shortage of workers has boosted wages and business costs, causing many businesses to raise prices. This is especially true for businesses needing cheap, low-skill workers. Wages and prices have risen more in percentage terms for fast food than for full-service restaurants, for example. Finally, shipping bottlenecks have also raised costs for many businesses.

Prices rose 0.9% in June, the fourth large monthly increase in a row. Used-vehicle prices continued to surge in June, and are now 45.2% above a year ago, while new-vehicle prices are up 5.3%. Shortages of rental vehicles continue to push rates up; they are 87.7% above a year ago. Shortages of computer chips caused computer and television prices to rise; normally, these would have declined.

Food prices, especially meat, rose briskly in June. However, agricultural commodity markets appear to be stabilizing, so this brings hope that food prices will stop rising, though they’ll stay at high levels.

Now that many vaccinations have been completed, people are starting to eat out and travel again. Restaurant prices rose 0.7% in June from the month before, and 4.2% from a year ago. Restaurants are facing increasing costs for both labor and food. Airfares have risen 24.6% from a year ago, and hotel/motel rates are up 16.9%. Energy prices typically rise at the beginning of the summer travel season; they rose 1.5% in June from May (and 24.5% from a year ago).

This surge in inflation is going to create a quandary for the Federal Reserve, since one of the Fed’s goals is to fight inflation. But Fed Chair Jerome Powell has indicated a commitment to keeping short-term interest rates near zero in order to push down the unemployment rate, and his analysts tell him that the inflation surge is temporary. So it is likely that the Fed will stand pat, but if strong consumer demand means that businesses now have pricing power, then this could create a self-fulfilling prophecy of rising prices, leaving the Fed to play catchup.

Print-ready Consumer Price Index chart

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