The United States added 379,000 solid jobs in February, and the economy is poised to take off, but improved growth prospects could have a short-term cost.
In a word, inflation.
Make no mistake, inflation is still very low now and it has been in the last decade. The coronavirus pandemic caused inflation early last year and even now, prices are rising by less than 2% a year.
Read: Inflation concerns have returned. Should you worry?
The loss of so many jobs during the pandemic – almost 10 million are still missing – and the resulting drop in demand also contribute to maintaining 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 the Bank of the West.
See: A visual look at how an unjust pandemic has reshaped work and home
This could change in the coming months. How come? Rising oil prices. Lack of raw materials and other key consumables, such as timber and semiconductors. And another round of massive government financial aid to Americans.
After falling close to zero in 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 main 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 by 0.3% in February, reducing the annual rate 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 estimate that the cost of living will rise by more than 2% annually and exceed the Federal Reserve’s 2% target.
Evidence of rising prices is rising. A couple of ISM procurement managers’ reports last week, for example, showed that companies pay higher gross prices for a wide range of goods they need to produce goods and services.
A barometer of prices for business consumables has risen to a 10-year high, leading a wholesale executive to worry about “a continuous influx of price increases due to the shortage of raw materials, the shortage of power work and transport delays ”.
Then there are oil prices. The cost of oil has risen by 25% since early January after Saudi Arabia and other non-US suppliers cut production. This is fueled by higher prices.
Throwing fuel on the fire is a financial aid from Washington of almost 2 trillion dollars, just as the economy seems to be accelerating. The congress led by Democrats and the White House are expected to approve the bill in a few days.
The result is that inflation will certainly rise in the coming months. The big question is, will it just be a temporary phenomenon related to a complete reopening or economy? Or something worse that will persevere?
Fed Chairman Jerome Powell and most senior central bank officials are betting that price increases will not last. Powell has repeatedly predicted that the expected explosion of inflation will disappear and will not pose a threat to the economy.
The danger, some economists warn, is that rising inflation will create more uncertainty among investors, raise interest rates and potentially affect the economic recovery.
Home sales, car sales and many other consumer and business activities have benefited greatly from basic interest rates. And that’s without mentioning the record gains on the stock market that some critics of the Fed link to the central bank’s light money strategy.
Even if Powell is right, rising inflation is likely to complicate the path to a US economic recovery if investors continue to have doubts.
“Powell is ready to let inflation take off and is unlikely to take action if it does not get out of hand,” economists James Knightley and Padhraic Garvey of ING said in a note to customers. “The problem is that we won’t know if he’s in control or out of control until we let him break a little.”