The U.S. added 379,000 strong jobs in February and the economy is expected to slow down, but cost growth could be expected to improve in the short term.
In a word, inflation.
Make no mistake, inflation is still very low right now and has been for the last decade. The pandemic coronavirus wiped out inflation early last year and even now, prices are rising below 2% every year.
Read: Inflation worries are back. Should you worry?
With the loss of so many jobs during the pandemic – nearly 10 million are still needed – and the reduction in demand is also helping to keep inflation at bay.
“It is difficult, if not impossible, to generate stable inflation and higher expectations of inflation when the economy is still so far from full employment,” said chief economist Scott Anderson of Bank of the West.
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That may change in the coming months. How come? Rising oil prices. Lack of raw materials and other major supplies such as wood and semiconductors. And another round of huge government funding for Americans.
After falling to near zero in May last year, the annual rise in the consumer price index rose to 1.4% in January – and is expected to continue to rise. The CPI is the government’s main tool for monitoring the cost of living and determining the extent to which to increase Social Security benefits each year, among other things.
Economists predict that the CPI will rise 0.3% in February, pushing the year ‘s rate up to 1.7%. The report, which comes out next Wednesday, is the highlight of the week on a light economic calendar.
See: MarketWatch Economic Calendar
By the summer, many economists predict that the cost of living will rise above 2% per year and push past the Federal Reserve’s 2% target.
Evidence of rising prices is rising. A pair of ISM purchasing managers ’reports last week showed, for example, that companies are paying significantly higher prices for a wide range of supplies they need to make goods and services.
One price barometer for industrial supply went up to a 10-year high, prompting one wholesale official to complain about “a continuing flow of price increases due to raw material shortages, labor shortages, and transportation delays.”
Then there are oil prices. Petrol costs have jumped 25% since early January after Saudi Arabia and other suppliers outside the U.S. broke down. That also feeds into higher prices.
Throwing fuel on the fire is nearly $ 2 trillion in new financial support from Washington just as the economy appears to be accelerating. The bill is expected to be approved by Congress and the Democratic-led White House in a few days.
The upshot is, inflation is sure to rise in the coming months. The big question is, will it just be a temporary thing linked to a full reopening or the economy? Or something worse that will last?
Fed Chairman Jerome Powell and senior central bank officials are promising that price rises will not last. Powell has reiterated that the expected inflation explosion is imminent and will not pose a threat to the economy.
The danger, some economists warn, is that a spike in inflation will create more uncertainty among investors, driving higher interest rates and potentially rebounding. -avoid economic recovery.
Home sales, car sales and many other consumer and business activities have benefited greatly from rock-level interest rates. And that’s not to mention the stock market benefits that some Fed critics link to the central bank’s easy money strategy.
Even if Powell is right, rising inflation is likely to pose a problem in the path of U.S. economic recovery if investors continue to dispel doubts.
“Powell is willing to let inflation go off, and is unlikely to take action, unless it gets out of hand,” said economists James Knightley and ING’s Patrick Garvey in a note to the clients. “The problem is we don’t know if he’s in or out of control until we let him rip a little.”