At this time last year, economists were hopeful that snarls in global shipping and manufacturing would soon clear; consumer spending would shift away from goods and back to services; and the combination would allow supply and demand to come back into balance, slowing price increases on everything from cars to couches. That has happened, but only gradually. It has also taken longer to translate into lower consumer prices than some economists had expected.
Inflation F.A.Q.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
But the expected shift is finally, if belatedly, showing up. After months of supply chain healing, consumers are now beginning to feel the benefit. Used car prices began declining meaningfully in October inflation data, furniture prices are slumping and apparel is falling in price. Similar cost declines are expected to weigh on inflation next year.
“It is far too early to declare goods inflation vanquished, but if current trends continue, goods prices should begin to exert downward pressure on overall inflation in coming months,” Jerome H. Powell, the Fed chair, said during a recent speech.
The Fed is working on cooling demand.
Unfortunately, moderation in goods prices alone would probably fail to return America to a normal inflation rate, because price increases for services have been accelerating. That category — which covers everything from meals out to monthly rent — accounted for half of consumer price inflation in October, based on a Bloomberg breakdown, up from less than a third a year earlier.
Many types of service inflation are closely intertwined with what’s happening in the job market. For companies including hair salons, restaurant chains and tax accountants, paying employees is typically a major, if not the biggest, cost of doing business. When workers are scarce and wages are climbing rapidly, businesses are more likely to raise their prices to try to cover heftier labor bills.
That means that today’s very low unemployment and abnormally rapid wage growth could help to keep price increases faster than usual, even though the job market wasn’t a big driver of the initial burst in inflation.
That is where Fed policy could come in. Companies can only charge more if their customers are able — and willing — to pay more. The Fed can stop that chain reaction by lifting interest rates to slow demand.
Read More: Inflation Forecasts Were Wrong Last Year. Should We Believe Them Now?