Inflation within the US has risen rapidly as a consequence of pandemic-related lockdowns, supply chain difficulties and speculation. This increase is anticipated to regularly moderate as these disruptions fade over time.
However, this lower inflation should be too high to guard consumers affected by the economic disruption brought on by the coronavirus.
Inflation before the pandemic
Before COVID-19, inflation was stable at around 2% in 2019. Although consumers showed signs of weakness, the Federal Reserve offset the negative effects of inflation through monetary stimulus.
Consumer weakness was reflected in sharp increases in the costs of essential goods relative to their non-essential counterparts. For example, within the five years to December 2019, prices for basic food, rent and healthcare tended to rise faster than those for luxury goods equivalent to clothing, leisure and cars.
Monetary policy contributed to rising housing costs by increasing the concentration of ownership in residential property. This, in turn, weakened consumer purchasing power: as the associated fee of essential goods rose, there was less left for non-essentials.
US Consumer Price Index (CPI), 12-month percentage change
Covid-19: Inflation rises
Inflation has surged across all categories through the pandemic. Initially, supply chain disruptions and the lockdown effect were the cause, but as the assorted waves of infection subsided, pent-up demand, production and distribution pressures, and better commodity prices driven by speculation continued to push inflation higher.
US inflation before and after COVID-19
| Dec. 2019 (year-on-year comparison) | Five years cumulative until Dec. 2019 |
Dec. 2020 (year-on-year comparison) | Jan 2020 to July 2021 | |
| Total inflation | 2.3% | 9% | 1.3% | 5.4% |
| Basic equipment | ||||
| Food and beverages | 1.7% | 6% | 3.9% | 6.6% |
| Rent of foremost residence | 3.7% | 20% | 2.3% | 3.6% |
| Medical care | 4.6% | 16% | 1.8% | 2.7% |
| Discretionary | ||||
| clothing | -1.2% | -3% | -4.1% | -0.7 |
| recreation | 1.5% | 5% | 0.9% | 3.3% |
| New cars | 0.1% | 0% | 1.9% | 7.4% |
| used cars | -0.7% | -5% | 10% | 42.1% |
| Household items | 1 % | 1 % | 3.2% | 5.4% |
Source: US Bureau of Labor Statistics
Gradual normalization?
At the moment Inflation within the US rose to five.3% year-on-yearInflation is anticipated to return to its long-term average of two% as excess demand fades, the distribution network adjusts to the brand new normal and continued consumer weakness impacts prices.
Finally, pent-up demand is temporary in nature. As the economy reopens, lockdowns end, and the necessity for work-from-home items declines as staff return to the office or adjust to their distant jobs, upward pressure on inflation will ease.
In fact, data suggests that consumer demand growth may have already got peaked. Retail sales growth appears to have peaked in April 2021. After a pointy increase in mid-2020, auto sales growth also appears to have normalized.
Retail and catering sales (year-on-year)
Supply chains are also functioning fully again. Sub-indices of the ISM Manufacturing PMI equivalent to supplier delivery times and order backlogs appear to have peaked as raw material inventories have bottomed out. The pressure on supply chains is subsequently decreasing.
Since consumers as a complete haven’t emerged from the pandemic financially stronger, consumer demand is more likely to remain weak. This is more likely to further slow inflation.
Supplier deliveries, slowdown (Indices)
Given these aspects, we will expect the rise in inflation within the US to decelerate.
Similar trends are emerging elsewhere, including Canada, Germany, the UK and Japan. A sudden spike in Covid-19-related inflation is now moderating and returning to the long-term trend line in most categories. Of course, there are exceptions, notably within the oil and housing sectors in some markets, as a consequence of loose monetary policy and speculation.
The inflation outlook
In summary, consumer demand and low rates of interest will proceed to be the foremost drivers of inflation. Continued consumer weakness is more likely to drive inflation lower and require further Fed support. The influence of other, event-specific inflation drivers is more likely to diminish as economies adjust to the brand new reality.
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