The U.S. added a solid 379,000 jobs in February and the economy plans to pick up, but in the short term, improved growth prospects may be costly.
In a word, inflation.
Make no mistake, inflation is still very low at the moment and that was the last decade. The coronavirus pandemic caused inflation to disappear early last year and even now prices are rising less than 2% per year.
Read: Inflation concerns are back. Do you have to worry?
The loss of so many jobs during the pandemic – almost 10 million are still missing – and the consequent drop in demand also help to cover inflation.
“It is difficult, if not impossible, to generate sustained inflation and higher inflation expectations when the economy is still so far from full-time employment,” said Bank of the West chief economist Scott Anderson.
See: A visual look at how an unfair pandemic has changed work and home
This may change in the coming months. Why? Rising oil prices. Shortages of raw materials and other important supplies such as wood and semiconductors. And another round of massive financial aid for Americans.
After falling to almost zero last May, the annual rise in the consumer price index rose to 1.4% in January – and this is expected to continue to increase. The CPI is the government’s most important tool for, among other things, tracking down the cost of living and determining how much you should increase, among other things, social benefits each year.
Economists predict that the CPI will rise by 0.3% in February, pushing the annual rate to as high as 1.7%. The report, which appears next Wednesday, is the highlight of the week on a light economic calendar.
See: MarketWatch Economic Calendar
By summer, many economists estimate that the cost of living will rise above 2% annually and exceed the 2% target of the Federal Reserve.
The evidence of rising prices is increasing. For example, a few ISM Purchasing Manager reports last week showed that companies are paying sharply higher prices for a wide range of supplies they need to produce goods and services.
One price barometer for business inventories rose to a ten-year high, leading to a major executive worrying about “a steady inflow of price increases due to raw material shortages, labor shortages and transport delays.” ‘
Then there are oil prices. The cost of petroleum has risen by 25% since the beginning of January after Saudi Arabia and other suppliers outside the US reduced production. This also leads to higher prices.
Throwing fuel on the fire amounts to nearly $ 2 billion in new financial aid from Washington, just as the economy seems to be accelerating. The Congress and the White House, led by the Democratic Republic, are expected to approve the bill within days.
As a result, inflation will definitely rise in the coming months. The big question is, will it just be a temporary phenomenon linked to a full reopening or the economy? Or something worse that will continue?
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 burst of inflation will subside and pose no threat to the economy.
According to some economists, there is a danger that an increase in inflation will create more uncertainty for investors, raise interest rates and potentially hurt the economic recovery.
Home sales, car sales and many other consumer and business activities have benefited greatly from the lower interest rates. And not to mention record profits that some Fed critics attach to the central bank’s easy money strategy.
Even if Powell is right, the rise in inflation is likely to hinder the path of a US economic recovery if investors remain in doubt.
“Powell is prepared to push inflation up, and is probably not in the light of it unless it gets out of control,” economists James Knightley and Padhraic Garvey of ING said in a comment to clients. “The problem is, we will not know if it is in or out of control until we tear it up a little bit.”