Pandemic-Related Problems Continue To Push Prices Higher

By Christine Cooper and Rafael De Anda

CoStar Analytics

February 16, 2022 | 6:38 AM

Inflation reaccelerated in the United States in January, with prices rising 0.6% over the month and 7.5% from a year ago, according to the Bureau of Labor Statistics. The pace of growth appears to be lingering for longer than expected.

Since 1990, the month-over-month change in the consumer price index has averaged 0.2%, far below what we’ve recently experienced. January marked the fourth consecutive month with prices growing by more than 0.5%.

Prices for food (0.9%) and energy (0.9%) have become problematic for households, especially those with lower incomes where a larger share of spending goes towards these categories. The recent increases are now costing households about $250 per month more than they would have spent a year ago on the same consumption bundle.

The foods we consume at home are not the same foods we consume when we dine out, so every time the health situation changes, shortages and surpluses of different food items emerge. A surge in COVID cases last month diverted households away from dining out, where prices grew by 0.7% over the month, and more towards dining at home,

where prices grew by 1%.

Food and energy prices are usually quite volatile, and that volatility can mask broader trends. Excluding these categories, the core price index also grew by 0.6% in January (rounded). This index has grown at a rate slower than the headline rate of inflation in seven of the preceding eight months.

Firms have had more pricing power in recent months and have used that power as their costs of labor and inputs have risen, as seen in the recent release of producer prices. That has led to more widespread consumer inflation across categories, including recreational items (1% growth over the month), medical care items (0.9%), and recreational services (0.8%), where price growth had been modest before January. Prices for household furnishings grew by 1.6% in January — more than any of the major categories — as the surge in demand for interior improvements during the lengthened period of working from home continues unabated.

Outliers in experiencing price increase have been motor vehicles. The exorbitant pace at which used cars and trucks prices have grown slowed in January to only 1.5% over the month, but these prices are still more than 40% higher than a year ago. New vehicle prices were flat during the month yet are still 12.2% higher than a year ago.

The global semiconductor shortage, exacerbated by supply chain disorder, labor shortages due to workers falling ill or quarantining, and shipping congestion, has hindered automobile production for more than a year. Still, prices are expected to slow or even decline once production lines are back up and running at full capacity. Furthermore, slowing COVID cases across much of the U.S. are allowing more commuters to return to public transit, potentially cooling demand for vehicles.

We have been watching the impact of rising housing costs on price indices. In the consumer price index, rents grew by 0.5% over the month while owners’ equivalent of rent grew by 0.4%. The latter reflects the portion of homeowners’ housing costs that would have gone towards rent had they not owned the property in which they reside.

Rents, as reported by the Bureau of Labor Statistics, have trailed CoStar’s Apartment rent series by roughly six months, as CoStar captures listed rents at a much higher frequency. As apartment rent growth has slowed from the highs seen last summer, rents could soon become a drag on the consumer price index in coming months.

While January’s consumer price index surprised to upside, consumers expectations of inflation surprised to the downside. According to the Federal Reserve Bank of New York’s Survey of Consumers, expectations of inflation one year ahead fell to 5.8% from 6% in December. Inflation expectations for three years ahead have fallen from a peak of 4.2% in October to 3.5% in January. This was the third month that indicator fell, so while we might be in for inflated prices in the short term, it appears that consumers, at least, are sure that prices will moderate in the next few years.

Continued COVID cases and ubiquitous commentary of runaway inflation are taking their toll. Consumer confidence dropped to its lowest level in early February, according to the University of Michigan’s Survey of Consumers. The survey’s index of consumers’ assessments of current economic conditions fell to 68.5, its lowest level since August of

2009, while the index of their expectations of future conditions, falling to 57.4, reached its lowest level since November 2011.

The return of COVID cases in the second half of 2021, with the delta variant spreading across the nation, along with rising prices caused by the imbalance between demand and supply, have weighed on consumers, who were broadly feeling better especially as vaccines became available in early 2021.

Federal Reserve Set to Take Action

The unexpected uptick in inflation and consequent fall in consumer sentiment have prompted several Federal Reserve Board members to make public comments about the board’s commitment to battle the problem. Yet apart from St. Louis Fed President James Bullard, who called for an increase of 100 basis points in the federal fund rate by July and a reduction of the Fed’s balance sheet by the second quarter of 2022 in a Bloomberg interview, other members of the Board are suggesting more measured moves so as not to panic markets. For example, San Francisco Fed President Mary Daly warned that abrupt and aggressive actions could destabilize prices when asked about a 50 basis point hike in March during a CBS interview. Likewise, Atlanta Fed President Raphael Bostic admitted that he is thinking of a 25 basis point increase at the upcoming March meeting in an interview with CNBC. As public sentiment over escalating prices worsens, expect to hear more soothing remarks from Fed governors reinforcing their competency at dealing with inflation.

What We’re Watching...

This week and next we’ll see updated readings on the health of the housing market. Record low inventories have faced strong demand, pushing prices higher for both new and existing homes. But with interest rates set to rise, we’ll be watching to see if the market has reached a peak, as affordability continues to wane, and more potential buyers are priced out of the market.

Cooper, Christine, and Rafael De Anda. “Pandemic-Related Problems Continue To Push Prices Higher.” Costa Economy, 16 Feb. 2022. Accessed 22 Feb. 2022.