Ever since the Americans returned to China from the end of World War II, inflation has never penetrated the economy like it does now.

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On June 3, 2021, the Valley Center community in California, USA, showed that the residential single-family house of KB Home was under construction.

Mike Black | Reuters

Since the Americans returned to China from the end of World War II, inflation has never penetrated the US economy as it does now, and it may continue to do so in the coming months.

That’s because the pandemic has hit the economy like a sledgehammer, disrupting normal business operations and consumer lifestyles. Many companies’ interruptions have been difficult to repair. Due to supply chain interruptions and labor shortages, returning to normal has always been challenging.

“The economy has undergone a very rapid and sudden transformation,” said Michael Gabon, Barclays chief U.S. economist. “And it takes time to refit. This is a supertanker. It takes time to turn.”

Companies and consumers across the country are feeling the impact of price increases and shortages of goods, and many companies are adjusting their business methods.

Frank Barbera, president of Barbera Homes in Albany, New York, said that this period of price increases is unique in the 30-year history of his family business.

“The cost must have risen faster than the price. Our average house price has risen by more than US$60,000, which is just a hard cost. For example, the average price from July 2020 to the past year is 2×4. During 2021, from US$4.30 To $11.36,” he said. 2×4 is now about 50% lower, but the wood is still unstable.

Barbera said that the prices of other building materials have also risen, including an increase of 20% in insulation materials this year.

Homebuilder Chris Carr says his construction company has changed the way he buys some materials for the houses he builds in New Jersey’s seaside towns such as Avalon and Stone Harbor.

Carl, the owner of McLaughlin Construction, said: “We have gained more storage space so we can store everything we buy. We are buying truck roofing materials” plumbing supplies and other materials.

“Before we became instant buyers, so for certain aspects of the house, we couldn’t do that anymore.”

Price pressure

Repressed demand, lifestyle changes, and large amounts of stimulus funds have led to a surge in demand for various commodities. However, this demand has met the supply network that was also damaged by the pandemic, and efforts are being made to return to more normal levels of activity. Labor shortages and logistics issues further complicate the situation.

Gapen said that the consumption of core commodities is now about 17% to 20% higher than pre-pandemic levels, and the demand for core services has not yet recovered. The core commodities do not include food and energy.

“Just like any economy will run into trouble under any circumstances, if its citizens ask it to produce 20% more goods within a year,” he said. Consumers changed their lifestyles after the pandemic. Many people fled to the suburbs and further afield, moved into houses, and set up home offices. They also need cars.

“This is the biggest historical anomaly in the relationship between the prices of core goods and services that we have seen since the end of World War II,” Gabon said. “I think the experience of World War II is closest to what we have seen.”

In the late 1940s, soldiers returned home, and demand for everything from housing to clothing soared. “You have to readjust the economy and re-employ all these people. What happened is that your inflation rate has risen for two to three years,” Gabon said. “By the end of the 1940s, you were flirting with deflation.”

The debate among economists is how much of the inflation in this pandemic era will persist and how much is temporary. The consumer price index in October rose 6.2% year-on-year, the highest in 31 years. The core CPI, which excludes food and energy, rose 4.6%.

Commodity prices rose across the board. Gasoline prices in October rose by about 50% from last year. Used cars increased by 26% year-on-year, and new cars increased by nearly 10% year-on-year.

The index of meat, poultry, fish and eggs rose by 11.9% in October, while beef prices rose by 20% from the same period last year.

“This is a story of relative demand. Three [core] Commodity categories are the main cause of inflation-cars, second-hand cars and household goods. Larger durable items,” he said.

The prices of core commodities relative to services have fallen for decades. “Due to factors such as technological innovation and globalization, commodity prices and trends have soared. This is really unusual. It means that you might pay more for that computer, but you have a computer today than you have in 20 years. Computers were much more powerful before,” Gabon said.

Clothing and electrical appliances are two areas where globalization has led to a downward trend in prices. According to Moody’s analysis, relative to the overall consumer price index, the price of home appliances has fallen by 46% since 2000, which means that the price of home appliances is higher, but 46% lower than consumer prices. Clothing prices are also higher, but they are 43% lower than consumer prices in the same period.

One area where prices are rising very rapidly is hospital services, where prices have been 92% higher than overall consumer prices since 2000.

Gapen pointed out that consumers tend to stop buying durable goods during more traditional downturns, leading to lower prices of core commodities. But as the economy recovers from the downturn, households’ demand for durable goods tends to increase, thereby causing prices to rise.

But this pandemic is unusual. On the contrary, it has pushed up the prices of goods relative to services and raised concerns about how long prices will rise.

Mark Zandi, chief economist at Moody’s Analytics, does expect prices in certain categories to fall next year.

At the same time, as consumers and companies buy hard-to-obtain items, inflation may increase on its own, causing prices to rise further. But once producers catch up, increased inventory and overproduction may cause prices to fall, and this cycle will be interrupted.

Therefore, he predicts that the core CPI inflation rate excluding food and energy will eventually fall back to around 2.5%.

“It may be until early 2023, but I think we will stabilize at a core CPI of 2.5%. I actually think that prices may actually fall again. I think energy prices will rise, car prices will rise, and various building prices will also rise. . Materials will come in,” he said.

However, there is still the risk that they will not do so.

“If these price spikes do affect inflation expectations and embed wage price dynamics, then we will have problems,” Zandi said. “I don’t think we are there. I think this is a shock to the supply of garden varieties, causing prices to soar, but sowing the seeds of future decline.”

“By then, prices will fall back, and I think this is the dynamic we are going to see,” he said.

Pay rent

Housing costs are an area where many renters are expected to rise sharply, but the CPI in October rose by only 3.5% year-on-year. This category includes rent and landlord’s equivalent rent, accounting for about one-third of the CPI.

Rent is an area where economists expect prices to continue to rise, even if prices in other categories fall. According to the Apartment List, national rents rose by 16% from the beginning of this year to October, and CPI data should start to catch up.

“This has been affected by the pandemic, but whether there is a pandemic or not, rental prices will rise due to the shortage of affordable housing,” Zandi said. “The pandemic made the situation worse because all these millennials returned to live with their parents, or doubled when the pandemic hit. They all started to live independently, start a family and rent a house.”

Zandi said that rents increased his CPI forecast of 2.5% by 0.5 percentage points, which is what keeps the inflation rate above the Fed’s 2% target.

Builders like Barbera still see strong demand for single-family homes, even if prices are much higher. To meet demand, Barbera is carefully managing what he builds.

“We have restricted our batch release, so in some communities we temporarily stop sales, or we limit the number of batches we put on the market at a time, so that we can not only better control costs, but also better control labor. Make sure we can produce the products we want. It’s on sale,” he said. “We are lucky. We have a very stable trading base, but everyone is working 24/7 just to keep up.”

He hopes that prices will begin to stabilize.

“Except for wood, I can’t foresee that the price of any products we currently use will fall, and I don’t think the labor force will fall. It will reach its peak, but the materials have not yet stabilized,” Barbera said.

But for small businesses, the challenge is to operate efficiently.

“As we see price increases, we have a lot of homeowners saying,’Oh my God, this is too expensive!’ Then, our job is to let them know what triggers the price,” Carl said. “Except for wood, the prices of all other materials we see are increasing. Every week, we receive price increases. This is a very turbulent market.”

Carl emphasized that in addition to wood, volatility has always been a way. “I have not received 2% to 3% price notifications from these suppliers. I have received 10% to 15% price increases multiple times a year,” he said. Carl said that depending on the housing, the cost of the past two years has been 25% to 50% higher. “The value of the land has increased. The entire package has increased.”


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