Inflation has hit the highest level since 2008, when gas prices exceeded $4 per gallon. Overall prices are up 4.9% during the last 12 months, with the biggest jumps in pandemic-affected parts of the economy. A shortage of semiconductors needed for new cars has pushed used-car prices up 30%. Transportation costs, driven by rising airfares, are up 20%, with volatile gas prices up 56%. Surging demand for real estate has pushed home prices up 13%, with many buyers shut out completely.
Consumers have clearly noticed, with inflation expectations rising, according to the New York Federal Reserve. What consumers may not have noticed, however, is that there’s little to no inflation in important parts of the economy, with Americans getting a break on some costs to help offset rising costs elsewhere.
The cost of medical care, for instance, has risen just 0.9% during the last year. That’s a sharp slowdown from the average of 2.8% during the last 10 years, and 4% in a few years. College tuition is up just 0.3% during the last year, compared with an average 2.7% annual increase during the last decade.
Home prices soared during the pandemic, spurred by historically low interest rates, strong demand and a shortage of new homes. But renters have been getting good deals, with average rent rising just 1.8% during the last year. In cities such as New York and Chicago, rents have dropped as people fled to more open areas, either temporarily or permanently.
Day care and preschool costs are up just 1.6%. Personal care services are up by the same amount. Educational costs, including things like books and supplies, are up just 1.9%. And technology, including computers, smartphones and Internet service, is flat, with just a 0.1% annual price change.
These odd inflation disparities reflect the ongoing disruptions the pandemic wrought on the global economy—and suggest inflation is a temporary phenomenon, not a long-term worry. “Transitory factors are driving prices higher right now,” economist Evan Karson of Moody’s Analytics wrote in a June 11 report. “We do not anticipate inflation of this speed to be the new norm. The economy’s reopening is a one-off event that is lifting prices of most leisure services, including admission tickets, airfare, hotels and rental cars.”
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In some ways, these scattershot inflation surges may not be as painful as the numbers make them sound. Many car shoppers can put off a purchase until more supply comes online and prices moderate. Leisure travel is discretionary. And the expenses people have to pay—rent, school costs, medical care— are things that have gone up the least. The one exception is gasoline, now around $3.10 per gallon. Still, that's within the range of the historical average for the last 15 years.
The lumber market may foretell where pandemic inflation is heading. Lumber prices hit record highs in May, due to supply shortages, strong demand for homes and a national remodeling binge. But prices have plunged 40% in just a few weeks and seem headed back toward normal levels. Since the surge in prices was adding as much as $36,000 to the average cost of a new home, the normalization of lumber prices will spell relief throughout the economy.
The Biden White House and the Federal Reserve insist the recent bout of inflation is “transitory,” and many economists agree. That means there’s no need for the Fed to start raising interest rates to combat inflation, as it has done in the past, since inflation should abate on its own. Financial markets also seem unperturbed, with the S&P 500 recently hitting a new record and bond prices subdued.
Consumers are in relatively good shape, too, with a glut of savings from a year of inactivity and wages that have held up well, for those who remained employed. Average hourly earnings are up 2% during the last year, which is much less than the 4.9% inflation rate, suggesting the typical worker is falling behind. But since February 2020—the last month before the pandemic disruptions—earnings are up 6.4%. That’s a statistical quirk reflecting a huge jump in average wages after the pandemic shutdowns last year, which happened because lower-paid workers got laid off in disproportionately large numbers, boosting the average for those still working. Aside from some 8 million people who are still unemployed, workers have held up better than many economists expected. They may not like inflation, but they can probably handle it.
Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.