One question dividing economists right now is whether higher inflation is a transitory consequence of economies gearing back up again, or a more nagging problem that could be the start of a dangerous upward spiral in prices.
Tuesday saw the release of more data that may not settle the debate, but does show that inflation is still on the rise – and that Americans are shaking up how they choose to splash the cash they’ve amassed from coronavirus pandemic savings.
Retail sales in May fell a bigger-than-expected 1.3 percent from a month earlier, the United States Department of Commerce said on Tuesday, as government stimulus cheques ran their course and consumers spent less at car dealerships and at furniture, electronic and home improvement stores.
But that’s not to say Americans are necessarily getting more tight-fisted. As the weather warms and coronavirus vaccination rates continue to climb, they are shifting their spending away from goods that marked pandemic stay-at-home culture and towards goods that define being out and about, such as personal care products (think teeth whiteners) as well as food and beverages.
In a note to clients on Tuesday, Michael Pearce, senior US economist at Capital Economics, said the 1.8 percent monthly increase in food and drinks sales in May “is an encouraging sign for the strength of the rebound in services consumption more broadly”, and reiterated his call that consumption will rise by 10 percent on an annualised basis in the second quarter.
That bodes well for the health of the US economy, given that consumer spending drives some two-thirds of growth.
But price spikes could become an issue if inflation becomes so pernicious that it forces the US central bank, the Federal Reserve, to raise interest rates – because higher interest rates dampen economic growth.
The Fed kicks off a two-day policy meeting on Tuesday.
Just in time for it, evidence rolled in on Tuesday that prices continue to climb as economies around the world reopen, triggering bottlenecks in supply chains and upping the costs of raw materials for factories, which in turn raises how much they charge to wholesalers.
The US Bureau of Labor Statistics said wholesale prices rose a record 0.8 percent in May on a monthly basis and a blistering 6.6 percent over the past 12 months – the biggest jump on record.
Food and energy prices led the advance higher in the US government’s Producer Price Index, with food prices jumping 2.6 percent last month and energy prices climbing 2.2 percent after contracting in April.
Though some economists – not to mention many Wall Street investors – fear that price increases could force the Fed to raise interest rates, Fed Chief Jerome Powell has repeatedly said that policymakers view the surge in inflation as temporary.
That view was shared by Oxford Economics US economists, who wrote in a note to clients on Tuesday: “Looking past the noise, producer price increases will slow as supply constraints relax and recalibrate to demand in the second half of 2021. With inflation expectations cooling and fiscal stimulus fading, we continue to share the Fed’s view that we are not entering an environment of spiraling prices.”