Americans haven’t heard this one in a while: Inflation is back. Consumer prices soared 4.2 percent from a year ago, the largest burst in more than a decade. That comes as the U.S. economy stages a dramatic reopening from the devastating coronavirus shock, with mobs of consumers ready to spend again after being sheltered in their homes for more than a year.
Underpinning the recovery is massive federal spending and an ultra-accommodative Federal Reserve, which has pledged to keep rates at rock bottom until the financial system has fully weathered the storm.
Rapid price gains haven’t proven to be much of an economic threat for the past four decades, averaging out to about 2.5 percent annually since 1986. Yet, deep-rooted in Americans’ minds is a 15-year stretch beginning in the 1970s, when consumer prices soared as high as nearly 15 percent in the aftermath of big federal spending, two oil shocks and a slow-moving Fed. Economists now call it the Great Inflation, an ugly label both for policymakers and consumers alike.
But is what’s happening now a repeat of the past, and should you be worried about your money losing value? Experts are saying it’s not yet time to panic, though it’s wise to re-evaluate your finances for smart inflation hedges.
“Inflation is probably the single biggest threat that faces investors over the long run, and what makes it more insidious is, unless you’re reminded of it as we have been recently, it’s kind of like oxygen,” says Scott Clemons, chief investment strategist at Brown Brothers Harriman. “It’s just always there without you noticing it.”
What’s causing the recent uptick in inflation?
The Fed, which Congress has put in charge of controlling inflation, typically wants price pressures to average out to about 2 percent over time. For the past decade, officials have encountered the direct opposite problem: lukewarm inflation, below the Fed’s 2 percent target. Officials say longer-run economic changes from globalization, fewer unions and technological innovations have helped create powerful disinflationary pressures.
U.S. central bankers and economists don’t see those forces disappearing; rather, they see the recent price bursts as a temporary phenomenon, reflecting a perfect storm of events related to the coronavirus.
Assembly lines shut down and firms operated at reduced capacity for months after cutting nearly 15 percent of all jobs in the U.S. economy, reducing production and leading to shortages.
Yet, demand in some corners of the economy popped, thanks to now-vaccinated consumers’ readiness to start traveling, dining out and spending again. A prime example: Airline ticket prices are already up 10.2 percent between March and April of this year, Transportation Security Administration (TSA) check ins are more than three times higher than they were back in March, while some companies haven’t been able to bring up their flight crews to complete capacity (Delta, for example, canceled over 100 flights in April due to staffing shortages).
That’s creating what’s called a…
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