Inflation is becoming the most-watched indicator in the economy. After a decade of inflation rarely hitting the 2 percent target set by the Federal Reserve, it has been consistently reaching levels not seen since the early 1980s in the past year.
The latest Bureau of Labor Statistics report on inflation was no different. While what’s under the hood of the report has and will change, the story remains a consistent one: prices rising across the board. Grid’s politics and ideas editor, Kay Steiger, talked with Matthew Zeitlin, Grid’s domestic economics reporter, about what this report means. This interview has been edited for length and clarity.
Grid: What are the big things that jump out at you looking at Thursday’s inflation numbers?
Matthew Zeitlin: Inflation is the highest it’s been since 1982, with prices rising 7.9 percent over the last year and 0.8 percent in February alone. While this was more or less in line with what economists had projected for this report, that only shows they’ve become more adept at forecasting in an inflationary environment.
G: What are some of the biggest “culprits” in inflation at the moment?
MZ: There’s two ways of looking at this. One is looking at what items are having the biggest increases in prices and then what’s actually driving the number up. If you looked at the former, you would still see used cars leading the pack. While the month-over-month prices actually fell modestly by 0.5 percent, overall they’re up over 40 percent in the last year.
But the real meat of the report is in the stuff that takes up a larger portion of spending in a typical month — energy, shelter, food. While overall prices were up 0.8 percent, energy inflation was at 3.5 percent, with gasoline prices rising 6.6 percent and home gas rising 1.5 percent. Even though electricity prices fell slightly, overall, electricity inflation is higher than all-items inflation over the past year.
Now, many economists — including those at the Federal Reserve — tend to look at a slightly different measure of inflation, one that excludes food and energy, precisely because those are so volatile and are tied to how certain commodities like grains and oil are being traded on the world market. (I know what you’re thinking — we’ll get to that later.) Inflation minus food and energy was 6.4 percent over the last year and 0.5 percent in February. While still growing steadily, price growth in that category hasn’t been accelerating.
Another place to look is at the service sector, especially the service sector minus electricity, which is tied to energy. Here inflation was 0.5 percent and has been rising over the last six months. The major culprit was likely housing, or shelter, as the Bureau of Labor Statistics likes to call it. It takes up a large portion of monthly spending and is up almost 5 percent in the last year. Moreover, inflation in this category has been accelerating, even as it has been slowing down or steady in other categories that make up a big portion of overall inflation.
G: Previously, you wrote that inflation has been driven in large part by the sharp increase in demand for goods (as opposed to services). But lately, you mentioned that the story of inflation has been changing. How is it changing, and how do we see that in this current report?
MZ: The story of inflation for the last year or so was one where it was driven pretty clearly by a few big trends that could be pretty connected to covid. The big one was used cars: When the country more or less shut down in the spring of 2020, some thought it was a calamity for the car industry. Rental car companies liquidated their fleets, and car manufacturers slashed orders for crucial parts — namely semiconductors — from Asia. But it turned out that not only did driving come back, it came back more than ever.
Whether you were leery of public transit or an airplane or just wanted to get your family the hell out of the house, people started buying up anything with four wheels and a motor.
Used car prices were up some 45 percent year over year last summer and, in the last year, are up over 40 percent still even if prices have finally started to fall. But used cars and other industries like it told a pretty similar story that could explain a lot of the inflation we were seeing.
The way in which inflation relates to the “covid economy” is now much less clear. As the economic and social impact of covid wanes, inflation has set in — in food, energy and even housing, all of which is less reliant on years-old ordering decisions by the people who run car factories.
G: How has the situation in Ukraine changed the story of inflation?
MZ: While it’s not reflected in this month’s report, which covers all of February, the situation in Ukraine has led to a rather dramatic spike in energy costs, with the price of crude oil jumping to as high as $130 per barrel earlier this week, the highest price since 2008, and gas prices rising to over $4.10, their highest recorded price. The conflict, if it continues, will also likely effect not just oil prices, but natural gas, and thereby electricity, as well as possibly food, as Ukraine and Russia are two of the largest exporters of grains.
G: You’ve also talked a lot about how the economy is still very wrapped up in covid. What do we know about inflation as it relates to covid in this moment?
MZ: At this point, the distinction between “covid” and “the normal economy” is becoming less and less clear. If things are weird for long enough, then they’re normal. But as we saw in the jobs data in January, a lot of people were not able to work because they were sick, which could have knock-on effects on inflation. There are also lots of more anecdotal and industry-focused reports on certain parts of the economy that are still very, very hot. In the housing sector, for example, builders and contractors are reporting long lead times to get supplies like doors and windows and keeping prices high to account for higher material cost.
To the extent something like that “relates to covid,” it would be because covid has changed the type of housing people demand or that work from home has enabled more people to move to cheaper and bigger homes, but it’s not something as direct as, say, the restaurant industry being slammed by closures or semiconductor factories in Asia being shut down because of a covid outbreak.
G: The Fed has announced some measures to tackle inflation. What are they, and what effect might we expect them to have in the coming months?
MZ: The biggest Federal Reserve policy change is still coming up: They’ve basically committed to hiking interest rates in March, bringing the key interest rate it controls off of the near-zero levels it’s been at since they cut interest rates to head off economic damage from the pandemic. At this point, the question isn’t so much if or even when rates will be raised, but by how much and how quickly. The Fed has also said it will end its asset purchase program, otherwise known as quantitative easing, this month.