Supply shocks result in recent surges in inflation
Inflation – the change in overall prices – is back within the headlines. After a sustained decline from an annual high of 9.0% in June 2022 to a recent low of three.1% year-on-year in January 2024, inflation has recently stopped falling. Prices were 3.5% higher in March 2024 than in March 2023. This “not quite falling, not quite rising” inflation pattern occurs even in a really low inflation environment and is the results of isolated price increases which have little to no impact Have an impact do with more demand. Instead, they’re related to produce shocks and maybe the market power of firms that prevent prices from falling further. This also signifies that further monetary tightening – higher rates of interest – will cause unnecessary economic stress. Addressing climate change through regulation and investment in renewable energy, increasing housing supply, enforcing antitrust regulations, and tackling junk fees will likely be more productive ways to scale back inflationary pressures, even within the short and medium term.
The basic theory of demand-driven inflation goes something like this. Strong hiring reduces unemployment. Low unemployment gives staff more power to demand higher wages. More jobs and better wages result in higher demand for a big selection of products and services. The additional demand results in higher prices – inflation. The Federal Reserve then supposedly must curb demand by raising rates of interest and reducing inflation, since higher rates of interest slow economic activity, increase unemployment, and reduce demand.
Inflation not demand driven
The data has not supported this argument in recent times. Most importantly, unemployment has remained below 4% for greater than two years – the longest such period in over 50 years – even with rapidly rising rates of interest. Nevertheless, non-inflation-adjusted wage growth has slowed, as has inflation. Demand growth stays strong. Ultimately, a robust labor market is consistent with slowing inflation, not rising inflation.
The latest data for March 2024 also contradicts the argument that higher demand is driving up prices. The data should show sharp and accelerating price increases for goods and services that folks wish to buy in the event that they have better-paying jobs.
Food prices at grocery stores are barely changing and rental inflation is slowing
That would mean faster price increases for food, for instance. Still, home food prices rose at an annual rate of 1.2% in March 2024 after remaining stagnant in February. Last yr food prices rose by 1.2%. Home food price changes have been around 4% over the past yr, with no clear trend.
Tenants may additionally wish to move to a greater location in the event that they have the next income. This should then be reflected in faster rent inflation. It is very important that this argument only applies to latest rental agreements. After all, when property owners raise existing tenants’ rents, it has nothing to do with demand – tenants don’t volunteer to pay more simply because they’ve greater paychecks. These rent increases for existing tenants as an alternative reflect the pricing power that owners have over tenants. Still, Zillow’s index For example, there isn’t a evidence of a sustained acceleration in latest rental prices. The index isn’t seasonally adjusted and due to this fact fluctuates from month to month. The calculations must keep in mind changes over a 12-month period to discover trends that will not be influenced by seasonal fluctuations. These calculations show that rents for newly listed apartments increased 3.6% from March 2023 to March 2024, near the recent low of three.3% from October 2022 to October 2023. Current rental price inflation for units available on the market can be pleasingly below the 5.8% increase from March 2022 to March 2023. There is little evidence of individuals moving into different and costlier rental units as wages and employment rise.
The price increase for currently available rental units can be significantly lower than the rise in rental prices for all rents, including rental extensions. This price index, which takes under consideration changes in latest rents, rose by 5.7% last yr. Importantly, rent increases for all rentals have regularly slowed over time and are expected to follow the pattern of latest rents. The data suggests that this pattern of slowing rental inflation is more likely to proceed for a while and reduce inflationary pressures. Not only is the rent increase not depending on demand, it is usually on a downward trend.
Supply-side disruptions are driving up prices in some areas
Factors aside from demand are currently driving inflation. In March alone, fuel prices rose by 14.4% on an annual basis. They have risen by 6.3% within the last twelve months, well above the value changes for all other goods. The essential reason for the upper gasoline prices is higher oil prices on global markets. These price increases result from this ongoing war in Ukraine and unrest within the Middle East corresponding to attacks on shipping routes within the Red Sea, the war in Gaza and Military strikes against Iran and Israel. Over time, investing in renewable energy sources will likely be the first approach to insulate the U.S. economy against such price spikes.
There was also a big increase in medical services in March. They rose at an annual rate of seven.2% this month, although this followed months of muted price increases for hospitals, doctors and other specialists. Health services grew a modest 2.1% within the 12 months to March.
Higher health care prices are difficult to reconcile with a requirement side story. People don’t suddenly go to hospitals and see more doctors once they get a raise, especially because most health care expenses are covered by insurance. Rather, hospitals and medical professionals often raise prices because they’ll charge more in a less competitive environment. However, most certainly the value increase in March 2024 reflects volatile price measurements that always fluctuate wildly. After all, the value increase was modest last yr.
Finally, automobile insurance prices also rose sharply. They rose by 31.2% on an annual basis in March 2024 alone and by 22.2% within the last twelve months. Again, it’s hard to assume that folks desired to spend more cash on automobile insurance last yr because that they had higher employment income. Rather, the sharp rise in automobile insurance prices could also be resulting from increasing demandspossibly related to the next frequency of climate change-related events corresponding to wildfires, floods and hurricanes.
The recent rise in inflation is resulting from a lot of aspects which have more to do with the provision of products and services. These include still too few inexpensive rental options, renewed oil price spikes, climate change-related events and possibly market concentration. The solutions must then also concentrate on the provision side. This means addressing climate change and the impacts of accelerating severe weather, enforcing antitrust laws, fighting hidden fees across industries, increasing housing supply and expanding renewable energy sources.
