We've all noticed it. The price of everything is going up. Gas, food, housing, clothing… everything costs more. CNBC reported how the S&P/Case-Shiller Index, a metric often used to measure inflation, rose a staggering 19.1% year over year, the largest increase in the series' history going back to 1987; and the Conference Board reported consumers now see inflation running at 6.8% 12 months from now. What makes this all the more frustrating, is that recent metrics show that higher prices may be here to stay.
How did we get here?
In response to the pandemic, both the Federal Government and the Federal Reserve initiated a number of monetary and fiscal policies that have led us to where we are now. Policies like approving multiple trillion dollar stimulus packages, enforcing near zero interest rates for over a year, purchasing $120 billion a month in treasuries, and mortgage-backed securities were all enacted in theory to stabilize markets and support the economy. But these tactics have proven to be little more than a veiled bailout for Wall Street. Though successful in the short term by putting more money in the average American's hands, the liquidity has caused the shrinking value of said dollar.
Looking ahead
Unfortunately, various factors like rising home prices and consumer confidence may contribute to even more inflationary pressures. These rising inflation rates have the potential to cause detrimental effects to consumer spending, and the larger economy, over the long term.
Let's take the real estate market for example. Housing represents 40% of the Consumer Price Index (CPI), another leading tool to measure inflation. This is worrisome because in a recent tweet Former Treasury Secretary and Obama White House economic advisor Larry Summers warned the public that recent housing price increases haven't shown up in the major indexes yet. So every time you hear that present inflation is transitory, remember what is soon to come.
This is further substantiated by Federal Reserve economists Xiaoqing Zhou and Jim Dolmas, who wrote that rising housing prices are usually a leading indicator for rents, which account for most of the shelter costs in the CPI calculations. The correlation, they said, hits with about an 18-month lag time. This will hit the DC area hard as DC home prices reportedly jumped 16% last year alone.
Inflation was expected and according to an article by Investopedia "can actually be good when the economy is not running at capacity, meaning there is unused labor or resources, inflation theoretically helps increase production." This may be especially true if worker wages also rise to match.
However, only time will tell how far this bout with inflation will go. Perehaps prices will go down once supply chains get back to normal and workers start flooding back…or maybe the consequences of last year's policies will result in permanently higher consumer prices and wages.