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The United States added 379,000 robust jobs in February and the economy is about to take off, but improving growth prospects could come at a cost in the near term.
In short, inflation.
Make no mistake, inflation is still very low right now and has been for ten years. The coronavirus pandemic stifled inflation early last year and even now prices are rising by less than 2% per year.
Read: Inflation worries are back. Do you have to worry?
The loss of so many jobs during the pandemic – nearly 10 million are still missing – and the resulting drop in demand is also helping to contain inflation.
“It is difficult, if not impossible, to generate sustained inflation and higher inflation expectations when the economy is still so far from full employment,” said chief economist Scott Anderson of Bank of the West.
See: A visual look at how an unfair pandemic has reshaped work and home
This could change in the coming months. How come? Rising oil prices. Shortages of raw materials and other essential supplies such as lumber and semiconductors. And another round of massive government financial aid to Americans.
After falling to near zero last May, 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 primary tool for tracking the cost of living and determining how much to increase Social Security benefits each year, among other things.
Economists predict that the CPI will rise 0.3% in February, pushing the annual rate up to 1.7%. The report, due out next Wednesday, is the highlight of the week on a light economic calendar.
See: MarketWatch Economic Calendar
By the summer, many economists estimate the cost of living will rise above 2% on an annual basis and push back the Federal Reserve’s 2% target.
Evidence of rising prices is mounting. A pair of reports from ISM purchasing managers last week, for example, showed that companies pay significantly higher prices for a wide range of supplies they need to produce goods and services.
A barometer of business supplies prices hit a 10-year high, prompting a wholesale executive to worry about a “continuing influx of price hikes due to shortages of raw materials, labor. ‘work and transport delays’.
Then there are the prices of oil. The cost of oil has jumped 25% since early January after Saudi Arabia and other suppliers outside the United States cut production. It also fuels higher prices.
Throwing gasoline on the fire represents nearly $ 2 trillion in new financial aid from Washington just as the economy appears to be accelerating. The Democratic-led Congress and the White House are expected to approve the bill in a few days.
The result is that inflation will certainly increase in the months to come. The big question is whether this will only be a temporary phenomenon linked to a complete reopening or to the economy? Or something worse that will persevere?
Fed Chairman Jerome Powell and most senior central bank officials are betting the price hikes won’t last. Powell has repeatedly predicted that the expected inflation surge will die down and pose no threat to the economy.
The danger, some economists warn, is that a rise in inflation will create more uncertainty for investors, push up interest rates and potentially undermine the economic recovery.
Home sales, auto sales and many other consumer and business activities benefited greatly from the lower interest rates. And that’s not to mention the record stock market gains that some Fed critics link to the central bank’s easy money strategy.
Even if Powell is right, rising inflation is likely to complicate the path of a US economic recovery if investors continue to harbor doubts.
“Powell is ready to let inflation take off, and he’s unlikely to act on it, unless it gets out of hand,” ING economists James Knightley and Padhraic Garvey said in a note to clients . “The problem is, we won’t know if it’s out of control or out of control until we let it rip a bit.”
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