Feeling Deflated by Inflation? UMD Economist Sees Price Pain as Transitory

Feeling Deflated by Inflation? UMD Economist Sees Price Pain as Transitory

Woman wearing mask shops for milk at grocery store

With consumer prices from food to energy soaring, a University of Maryland economist says a tightening labor market and shaky supply chains are primarily to blame—but suggested the current round of inflation would be transitory. Photo by iStock

If you’ve recently felt more pain at the pump or groceries have taken a bigger bite out of your wallet, it’s not just about your choice of gas station or brand-name cereal. An old economic foe has reared its head.

Consumer prices surged 6.2% last month compared to a year ago, according to data released last week by the U.S. Bureau of Labor Statistics, the largest annual rise in about 30 years. From higher energy costs filtering down into the price of almost every product to a crush of COVID-era demand driving up big-ticket items like cars, rent and real estate, inflation has put itself back on the agenda for economists and policymakers.

Maryland Today spoke yesterday with Katharine Abraham, a distinguished university professor in the University of Maryland Department of Economics who has served as commissioner of the Bureau of Labor Statistics and a member of the President’s Council on Economic Advisors, about why prices are rising now, whether there really is a worker shortage and how long inflation will linger.

What is inflation and how does it affect people?
Inflation is an increase in the cost of purchasing the goods and services that people typically buy. The Bureau of Labor Statistics figures out what people spend their money on and tracks the cost of buying that set of things. Inflation matters to people because if their pay is fixed, or their retirement benefits are fixed, then their money doesn’t go as far.

Why are prices rising now?
There are two things going on. The labor market is tightening, and employers are having more trouble recruiting people to fill their jobs. That’s leading them to raise wages, which in turn is going to mean higher prices.

More importantly, there have been big disruptions to the supply chains for many of the products that people buy. Over the last 20 years, there has been a big shift to a “just in time” inventory system. Businesses just don’t keep a lot of stock on hand. With the pandemic, supply chains have been disrupted, deliveries aren’t showing up as planned and that’s putting upward pressure on prices. The push for efficiency—the push to be lean and mean—has meant, unfortunately, that we’re less resilient.

How did the pandemic put so much pressure on consumer goods?
People didn’t feel safe going on vacation, so they bought big-screen TVs. People were spending all their time at home, and they realized, ‘This room could really use some new furniture.’ The increase in demand for some of these items drove up prices. Meanwhile spending on things like restaurants, hotels and entertainment generally was way down.

There has been a lot of discussion about a “great resignation,” and difficulty finding workers to fill the blue-collar jobs that will untangle the supply chain. Is that what’s happening?
The sudden drop in labor force participation in the spring of 2020 was unprecedented, and many of the people who left the labor force at the start of the pandemic still haven’t come back. When you ask people why they are not in the labor force, a good number still are saying they are afraid of getting COVID. But as vaccination rates continue to go up and we get the pandemic under control, I expect many of those people will come back.

I always take with somewhat of a grain of salt employers saying, “We can’t find people.” What they often mean is, “We have in mind a wage we want to pay and how experienced a person we think we should be able to hire, and we can’t find that person at that wage.” That’s a somewhat different thing than not being able to hire. Right now, what employers expect and what job seekers expect is out of whack, but that will get resolved over time.

With government assistance such as pandemic stimulus money, enhanced unemployment benefits and the current child tax credit, will people be able to weather these price increases better than in the past?
For many lower-income households, those payments have added up to a substantial amount of money and given people a bit of a cushion. But not everyone benefitted in the same way. If you’re a retiree, for example, you probably didn’t get the child tax credit.

Some White House officials have pushed back on the notion that we are entering a period like the 1970s, when inflation was a constant issue, and are instead facing more temporary problems similar to the post-World War II period. What’s your take?
One similarity (to World War II) is that you are making a big readjustment. You had factories making one set of things, and at the end of the war, all of a sudden different things were being demanded and you had to switch production over. At the end of World War II, there also was a lot of pent-up demand. There are some definite parallels to what’s going on now. All of a sudden, we’re seeing a surge in demand for all of the services no one was buying during the pandemic and businesses are having to ramp back up to provide them.

As to whether the pressures on prices will be lasting or transitory, I’m in the transitory camp. That bottlenecks we’re seeing will ease as supply chain issues get resolved.

Original news story written by Liam Farrell 

November 16, 2021

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